Court Opinion

ID: 9749662
Source: CourtListenerOpinion
Date Created: 2023-08-27 16:56:17.632512+00
Date Added: 2024-06-11T07:25:54.795483
License: Public Domain

ACREE, Judge,
Concurring:
I concur in the majority opinion but write separately, and respectfully, to address the dissent.
The dissent finds application of a marketability discount acceptable if it is applied at the corporate or enterprise level rather than at the shareholder level. This is consistent with the corporation’s position that relies largely on Cavalier Oil Corporation v. Harnett, 564 A.2d 1137, 1144-45 (Del.1989). But see Offenbecher v. Baron Services, Inc., 874 So.2d 532, 538 (Ala.Civ.App.2002) (“Cavalier Oil Corp. v. Harnett, 564 A.2d 1137 (Del.1989), did not hold that corporate-level discounting of minority shares (such as that undertaken by the trial court in this case) was permissible.”). For the reasons stated below, I disagree with the dissent’s view as it would be applied generally, and most particularly in this case.
The 8th Circuit Court of Appeals concisely stated my position: “Because ‘fair market value’ is irrelevant to the determination of fair value, market forces, such as the availability of buyers for the stock, do not affect the ultimate assessment of fair value in an appraisal proceeding.” Swope v. Siegel-Robert, Inc., 243 F.3d 486, 493 (8th Cir.2001). Why is “fair market value” irrelevant in a dissenter’s rights valuation? Because the goal under dissenters’ rights statutes is not to determine how a third-party purchaser might value the company — by definition that would be its fair market value. Instead, the goal is to determine the “fair value” of the company to those who currently own it — that is, the *917intrinsic value of the stock held by the dissenters who do not want to part with it but are compelled to do so, and the intrinsic value of that same stock to the majority shareholders who approved the merger and desire the dissenters’ stock for the corporation or for themselves.
In this case, as with any family-owned, closely-held corporation, there is no market for these shares. I see no justification for polluting a “fair value” appraisal under any circumstances, but particularly where no market exists, by incorporating in the analysis an antithetical factor — “fair market value” — which we define as “the price that a willing seller will take and a willing buyer will pay for property, neither being under any compulsion to sell or buy and both being in possession of all relevant information regarding the property.” Wilhite v. Rockwell Int’l Corp., 83 S.W.3d 516, 519 n. 6 (Ky.2002) (citations omitted). The dynamics of an arm’s-length transaction are not at play in a dissenter’s rights appraisal.
Once the stock’s value to third parties is introduced as a factor in a dissenters’ rights valuation, as it was in this case, other factors are effectively trumped and the valuation is no longer the stock’s “fair value” but its “fair market value.” Appropriately in my opinion, and consistent with the approach taken by the American Law Institute, the role of any “fair market value” consideration has been marginalized in a dissenter’s rights stock appraisal. See, e.g., Casey v. Brennan, 344 N.J.Super. 83, 780 A.2d 553, 570 (2001)(“Fair market value is only a potentially ‘valuable corroborative tool.’ ”).3
The purpose underlying dissenters’ rights statutes is to fairly compensate minority shareholders for the loss of veto power when the majority shareholders vote to take corporate action contrary to the minority shareholders’ wishes. See, e.g., Pueblo Bancorporation v. Lindoe, Inc., 63 P.3d 353, 358 (Colo.2003) (citing A.L.I., Principles of Corporate Governance: Analysis and Recommendations, Ch. 4 introductory note (1994)). “Fair market value” has little or nothing to do with determining the “fair value” of that veto power. In closely-held corporations in which there is no ready market for the shares (which typically carry restrictions on alienation), and consequently for which there is no fair market value, a “fair value” determination that is free of bargain-driven market influences is particularly appropriate. As noted by one commentator,
Close corporations by their nature have less value to outsiders, but at the same time their value may be even greater to other shareholders who want to keep the business in the form of a close corporation. Discounts would call *918for speculation by a court as to whether a market exists by requiring the judge to determine a value, deduct a variable percentage, decide how unmarketable a stock is, and so forth, which is clearly an undesirable result.
Bobbie J. Hollis, II, The Unfairness of Applying Lack of Marketability Discounts to Determine Fair Value in Dissenter’s Rights Cases, 25 J. CORP. L. 137, 141 (1999) (footnotes omitted).
Furthermore, Brooks Furniture Mfgrs. is not only a closely-held corporation; it is family-owned. Marketability discounts have been viewed as especially inapplicable to intra-family transfers in closely-held companies, as in this case. Harry J. Haynsworth, Valuation of Business Interests, 33 MeroeR L.Rev. 457, 489 n.92 (1982); see also Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J. 383, 734 A.2d 738, 745 (N.J.1999)(“Case law and commentators reject application of the marketability discount when shares are acquired by the corporation ... and marketability discounts have been viewed as especially inapplicable to intra-family transfers in closely-held companies[.]” (citations, quotations and brackets omitted)). “In family businesses, the members do not want outsiders to have ownership interests. Thus, the lack of marketability can actually enhance the value of the stock.” Haynsworth, supra, at 489 n. 92.
The dissent and the corporation posit that the ill effects of a “fair market value” factor are mooted by applying the marketability discount at the corporate level. The dissent cites In re Valuation of Common Stock of McLoon Oil Co., 565 A.2d 997 (Me.1989) for this point. I read McLoon differently.4 The corporation in McLoon, like the corporation in the case before us, was a closely-held, family-owned corporation. Like the corporate shares in the case sub judice, there was no market for shares of McLoon Oil Co. So, the appraisers imagined one. McLoon rejected the concept of an imaginary market.
In the absence of any trading history on any market, [the] attempt to construct a hypothetical market for this stock is a particularly useless — and dangerously misleading — exercise. In the situation in which the stock in question has never been traded on a market, courts and commentators alike have rejected construction of a market as too speculative to be helpful in the appraisal process.
McLoon at 1005 fn. 8 (citations omitted). After specifically rejecting the idea of a “hypothetical market transaction” for un-marketed stock, the Maine court agreed with the lower court’s finding “that market price has no reliability in the calculus of fair value in this case and accorded no weight to any market price factor.” Id. at 1005 (emphasis supplied). As the court also states, “no separate discounting per se of the whole fair value would be in order.” Id. at 1005 fn. 8 (emphasis supplied; citing Ford v. Courier-Journal). I read these statements as indicating there should be no lack of marketability discounting at any level.
Admittedly, McLoon would be clearer had the court resisted the urge to utilize traditional third-party sale concepts to describe its holding. However, rendered as *919it was before the more evolved “fair value” analyses of the Delaware and New Jersey courts and those of numerous commentators, it is not surprising the court turned to a ten-year-old case for concepts with which it was familiar — the “ ‘willing buyer/willing seller’ approach used by the court-appointed appraiser in Libby [In re Valuation of Common Stock of Libby, McNeill & Libby, 406 A.2d 54 (Me.1979) ] ‘so far as it goes[.]’ ” McLoon at 1004-05. McLoon’s analysis was a product of its time.
Today, because it alludes to what a single buyer would pay for the corporation while simultaneously rejecting marketability discounts, McLoon seems incongruous. On the one hand, Maine is not counted among those states that “clearly concluded that fair value may include marketability discounts.” Pueblo Bancorporation v. Lindoe, Inc., 68 P.3d 358, 367 (Colo.2003). On the other hand, a federal judge recently stated that, “[a]s required by Maine law, McLoon, 565 A.2d at 1003, I also must account for a marketability discount in my analysis[.]” Kaplan v. First Hartford Corp., 603 F.Supp.2d 195, 198 fn. 9 (D.Me.2009). Few Maine state court decisions cite McLoon, and those that do make no reference to marketability discounts, so we cannot find reconciliation of the incongruity there. We are left then with Kaplan.5
The court in Kaplan, like the dissent, focused on the same “single buyer” language in McLoon, but applied marketability concepts in a way that radically differs from that suggested by the dissent. The dissent suggests adjusting downward the net asset valuation of non-publicly-traded shares; Kaplan adjusted upward the market-based valuation of publicly-traded shares to arrive at “fair value.”6 Kaplan at 210. In Kaplan, the appraisers utilized a “market-based analysis [and] valued the business at $10 million, based upon minority interest stock transfers[, but the appraisal] did not correct for any minority or marketability discount.” Kaplan at 201. Applying McLoon, the court said:
Taking into account the market value reflected in [the minority interest stock transfers] and adjusting upward for an implicit marketability and minority discount, I conclude that the fair value of First Hartford’s entire business on September 15, 2005, was $15 million.
Kaplan at 210 (emphasis supplied). If the circuit court in our case had utilized a market-based approach, which it appropriately did not, and had followed McLoon/Kaplan, the result would have been an upward adjustment to account for the artificial devaluing of the company’s worth attributable to its lack of marketability.
McLoon/Kaplan reinforces my conviction that once the entire corporation has been valued as a going concern by applying an appraisal methodology that passes judicial muster, as here, then discounting for any reason taints the analysis and deprives the dissenters of the fair value of their stock, whether the discount is applied at the enterprise level or the shareholder level. The case sub judice illustrates why, subsequent to the determination of adjusted net asset value, no downward adjustment for “fair market *920value” is appropriate. The illustration begins with the valuation method selected.
The parties agreed that the corporation “should be valued as a going concern and on a controlling interest basis.” (Judicial Appraisal of Dissenters’ Shares, p. 4). The parties further agreed and the circuit court determined that “the asset accumulation method of valuation is the most appropriate method of valuation in this case.” (Judicial Appraisal, p. 5). In fact, the circuit court said “the only reliable valuation method in this case is the Asset Accumulation Method[,]” also known as the “adjusted net asset value” or “adjusted net book value” method. (Judicial Appraisal, pp. 11, 10). The income approach was rejected as “unreliable because of BFM’s lack of profitability in the years preceding the valuation, and the market approach was found deficient because of lack of comparability.” (Judicial Appraisal, p. 5). By rejecting these approaches, the circuit court, at least in part, already accounted for what the dissent refers to as “exceptional circumstances” justifying a discount for lack of marketability, i.e., “that buyers of money-losing businesses are hard to find and those who can be found might want to discount the value of the assets to account for the risk.”7 Once the adjusted net asset valuation method was applied, and the factual disputes regarding assets and liabilities were resolved, determination of “fair value” was achieved. But the court’s appraisal did not stop there.
The circuit court considered the corporation’s proposal to apply a 30% downward adjustment to the adjusted net asset value based on what the corporation’s appraiser called “BFM’s classification as a high risk investment and the length of time necessary to recruit a potential buyer and complete a sale of the company.” (Judicial Appraisal, p. 10). In the circuit court’s words, this 30% adjustment would have resulted “in a fair value of BFM using the Asset Accumulation Method of $6,394,847. The Court notes that this figure is less than the total of BFM’s cash reserves.” Judicial Appraisal, p. 9; emphasis supplied. In other words, the corporation’s adjustment for lack of marketability would have discounted all non-cash assets to a value of $0 and valued its cash reserves at less than 100 cents on the dollar. The circuit court, in my opinion, should have rejected this marketability discount outright and in its entirety as absurd, but it did not.
Instead, guided by Ford v. Courier-Journal, 639 S.W.2d 553 (1982), the circuit court considered whether any marketability discount at all should apply. Judicial Appraisal, p. 4. The court answered that question in the affirmative.
The Court would agree that an adjustment or marketability discount is appropriate in BFM’s case but not a discount or adjustment of 30%. While it is true that BFM was struggling on the date of valuation, BFM had cash reserves available to weather many storms [and the] leadership and business savvy in the person of Jerry Brooks, who has proven on more than one occasion that a way can be found to make BFM profitable. The Court believes these factors are important in determining the appropriate adjustment or discount.
Judicial Appraisal, p. 10. Apparently using the proposed 30% discount as a starting point and then accounting for these positive business factors, the circuit court *921reduced the corporation’s proposed discount from 30% to 20%, stating,
The Court’s Adjusted Net Book Value of Assets in the amount of $10,285,931.00 shall be adjusted by 20%. The Court finds the fair value of BFM using the Asset Accumulation Method to be $8,188,745.00.
Id. Relative to the absurd “fair value” determination urged by the corporation (a valuation of less than the corporation’s cash reserves), this determination of “fair value” is somewhat more reasonable, but only slightly so. As demonstrated below, when the 20% discount is applied to discountable assets, the circuit court’s determination of “fair value” is still artificially and unreasonably low.
Of the total adjusted net book value of assets ($10,235,931), at least $6,394,8478 was cash reserves according to the circuit court; therefore, non-cash assets had an adjusted net value of $3,841,084. Since, as the circuit court implied, it is simply wrong-headed to discount the value of cash reserves, we conclude that the circuit court’s $2,047,186 discount (from $10,235,931 to $8,188,745) was applied only to the non-cash assets, thereby lowering their value from $3,841,084 to $1,793,898 ($3,841,084-$2,047,186 = $1,793,898). That is a discount of non-cash assets of approximately 54%. Consider that the non-cash assets include land, land improvements and buildings with a cost basis of $2,720,348 and an adjusted net value of $1,755,000. Applying the 54% discount yields a “fair value” for the real property of $807,300, far less than one-third of the acquisition cost. It is this very type of windfall to the corporation and majority shareholders that the dissenters’ rights statutes were designed to eliminate. See Swope, 243 F.3d at 493-94; see also Hollis, supra, at 141-42 (“[Ajpplying a lack of marketability discount would allow the majority who approved the transaction to later buy out with a net gain what the minority dissenters have lost, granting the majority an unfair windfall”). The circuit court’s appraisal deprived the dissenter of “fair value” as defined in KRS § 271B.13-010(3) and awarded the majority a windfall.
After carefully considering the dissent, I agree with the majority that Ford should be reversed and that we should reject fair market value and other marketability considerations as a factor in dissenters’ rights stock valuations.
Having so concurred, however, I question the wisdom of allowing the introduction of evidence of the lack of marketability even under the single “exceptional circumstance” identified by the American Law Institute. See Hollis, supra, at 155 (“This exception is prone to judicial abuse and misinterpretation and should therefore be eliminated. This misuse can be readily seen as it was used by the New Jersey District Court and confirmed by the New Jersey Appellate Division in Lawson.” (referencing Lawson Mardon Wheaton, Inc. v. Smith, 315 N.J.Super. 32, 716 A.2d 550, 567 (1998), rev’d 160 N.J. 383, 734 A.2d 738 (1999))). As the majority notes, there was no evidence that the exception would apply in this case. Therefore, we need not, and in my opinion should not, indicate that Kentucky courts should necessarily entertain the exception.
For these reasons, and with this final reservation, I concur.

. The concept of "fair market value” as a "corroborative tool” can be traced to what one commentator identifies as the very first case in the country to apply a "fair value” analysis, or as it is also called, an “intrinsic value” analysis — Dermody v. Sticco, 191 N.J.Super. 192, 465 A.2d 948 (1983). See Nelson Ferebee Taylor, Evolution Of Corporate Combination Law: Policy Issues And Constitutional Questions, 76 N.C. L. REV. 687, 848 fn.692 (1998). Dermody, notably decided a year after Ford v. Courier-Journal, states that "[w]hile [the corporation's] payment above market price does not automatically translate into fairness, it does represent a factor in valuation which properly may be taken into account when a stock is publicly traded as in the present case.” Dermody, 465 A.2d at 951 (emphasis supplied). The "factor” referred to here is the "payment above market price" and not the market price itself. Presuming a market exists with which to compare the price offered for the dissenters’ stock, a payment below market price would be suspect. That is an example of the corroborative role of fair market value in these cases. Because Brooks Furniture Mfgrs. is not publicly traded and there is no market for the stock, fair market value cannot even be used as a corroborative tool.

. I am not alone in my reading of McLoon. A three-judge panel of this Court recently "adoptfed] the reasoning of McLoon as it pertains to closely held corporations " when it reversed and remanded a dissenters’ rights case instructing the court to value the minority shareholder’s stock “giving no weight to the fair market considerations of the net asset approach or the 25% marketability discount.” Shawnee Telecom Resources, Inc. v. Brown, No. 2008-CA-000042-MR, 2009 WL 2475269, at *3 (Ky.App., Aug. 14, 2009) (emphasis in original).

. And, of course, Shawnee Telecom Resources, Inc. v. Brown, at footnote 2, supra.

. Although the corporation in Kaplan was publicly traded, the court noted "it is traded only thinly on the Pink Sheets [a financial service that reports information about over-the-counter securities trading and issuers], and in some respects it behaves much like a closely held corporation.” Kaplan at 197, 197 fn. 3. In fact, one of the appraisers treated the corporation as though it were a closely-held corporation. Id. at 197 fn. 4.

. To clarify, I do not believe the inapplicability of the marketability discount is dependent upon the valuation method utilized, but that it is equally inapplicable regardless of the method.

. For purposes of illustration, I presume the cash reserves were exactly $6,394,847 although, according to the circuit court, they were greater, making the non-cash assets equal to less than $3,841,084. Applying the precise figures would yield a more significant, and therefore more unreasonable, discounting of non-cash assets.