Court Opinion

ID: 9749664
Source: CourtListenerOpinion
Date Created: 2023-08-27 16:56:17.64269+00
Date Added: 2024-06-11T07:25:54.798996
License: Public Domain

VANMETER, Judge,
Dissenting:
I respectfully dissent. The majority opinion analyzes the state of the law governing a trial court’s determination of “fair value” as mandated by KRS 271B.13-010, and reaches the conclusion that “marketability discounts are not applied in a dissenters’ rights action involving a closely held corporation absent exceptional circumstances.” Slip op. at 24. I do not disagree with that basic premise, but I do disagree with the application of that rule to the valuation of Brooks Furniture and the reversal of the trial court’s valuation on this issue, because my reading of the trial court’s appraisal is that it did not apply a marketability discount at the shareholder level.
As extensively quoted in the majority opinion:
In the statutory appraisal proceeding, the involuntary change of ownership caused by a merger requires as a matter of fairness that a dissenting shareholder be compensated for the loss of his proportionate interest in the business as an entity. The valuation focus under the appraisal statute is not the stock as a commodity, but rather the stock only as it represents a proportionate part of the enterprise as a whole. The question for the court becomes simple and direct: What is the best price a single buyer could reasonably be expected to pay for the firm as an entirety? The court then prorates that value for the whole firm equally among all shares of its common stock. The result is that all of those shares have the same fair value.
In re Valuation of Common Stock of McLoon Oil Co., 565 A.2d 997, 1004 (Me.1989) (emphasis added). As I read the trial court’s opinion, that it is exactly what it did. The trial court made the following explicit findings of fact:
In 1986, [Brooks Furniture] introduced glider rockers into its product line. The glider rocker was a huge success and sent [Brooks Furniture] on a run of profitability that lasted over ten years until competition with foreign manufacturers and huge discount stores such as Wal-Mart began to erode [Brooks Furniture]’s position in the glider rocker market. Between 1996 and November 30, 2004, gross sales declined yearly except for 2002, and the company began to operate in the red.
As a result, the trial court applied a marketability discount to the value of the entire corporation to account for the inherent risks of the corporation’s business and the greater competition faced by the corporation over the last ten years, and the fact that any potential buyer of the corporation would view the business as a “high risk” venture.
The trial court correctly noted that Ford v. Courier-Journal Job Printing Co., 639 S.W.2d 553 (Ky.App.1982), is the sole Kentucky opinion which addresses the issue of “fair value” in the context of a dissenting shareholder. While the majority opinion *923criticizes the use of a “marketability discount” in the context of a net asset valuation, a careful reading of Ford reveals that value of that business was derived by appraisers considering three components: fair market value, earnings or investment value, and net assets value. The marketability discount was not applied to the shares of the dissenting shareholder. Rather the marketability discount applied to valuation of the corporation as a whole. The court in Ford clearly stated:
The 25 per cent reduction in net asset value based on marketability was not an arbitrary or clearly erroneous figure. The appraisers noted in their report that in sales of some eight publicly held corporations there was an average of 24.2 per cent in discount from net asset value in similar sales.
Nor do we feel that the discount herein was applied merely because of the minority position of the appellants. The report indicates that the “minority interest” would be a consideration in discarding the “earnings related approach” as unsound, but that the discount applied to the net asset approach was an “overall” or a “marketability discount,” not a “minority” discount.
Id. at 556-57.
The majority opinion does not purport to overrule those aspects of Ford that requires “fair value” to be determined by the consideration of various means of determining value: market value, investment or earnings value and net asset value. Id. at 555. The criticism is that in this instance, because net asset value, as agreed by the appraisers, was the only appropriate means of valuing a money-losing business, the trial court erred in applying a lack of marketability discount to account for the facts that buyers of money-losing business are hard to find and those who can be found might want to discount the value of the assets to account for the risk.
Finally, I cannot help but observe that this case proves the adage that the best laid plans often go awry.9 The record suggests that Jerry embarked on an estate tax minimization plan in the 1970s, at a time when estate tax rates were much higher than they are today. As a result, he gave, as found by the trial court, shares of stock in the corporation to his wife and children. As an aside, I would note that this fact alone distinguishes the current case from the vast majority of cases involving dissenters’ rights; Hilton’s “investment” in Brooks Furniture arises not by virtue of a quid pro quo exchange of consideration, but merely by virtue of his father’s largess. Further, Hilton’s realization of any value from Brooks Furniture arises solely from the efforts of his father and brother since 1979. But, I digress.
Initially, Jerry brought both Hilton and Michael into the business, but for whatever reason, Hilton decided his interests lay elsewhere and pursued a medical career. Michael remained in the family business with all its attendant benefits and burdens. Over time the business was generally successful, but ultimately faced increased competitive pressures such that sales declined and eventually the business operated in the red. In the early 2000s, Jerry, nearing retirement, was faced with an estate-planning scenario which was vastly different from the one he faced in the 1970s.
In this instance, even under the majority rule adopted by the majority opinion, I would recognize in this case that excep*924tional circumstances exist such that the discount applied by the trial court to the value of Brooks Furniture as a whole, ie., at the corporate level, was proper. The application of the rule set forth by the majority opinion punishes Jerry for doing nothing more than estate planning. I would affirm the judgment of the Bell Circuit Court.

. Robert Burns, To a Mouse (1785):
... foresight may be vain:
The best laid schemes o’ Mice an’ Men,
Gang aft agley,
An’ lea'e us nought but grief an’ pain, For promis’d joy!