Court Opinion

ID: 9796352
Source: CourtListenerOpinion
Date Created: 2023-08-31 03:56:06.841594+00
Date Added: 2024-06-11T08:50:08.899980
License: Public Domain

Justice KOURLIS
dissenting:
In my view, defining “fair value” so to extinguish the possibility of marketability discounts in dissenters’ rights actions represents a policy decision that the General Assembly must make. Our statute is, as the majority notes, ambiguous. Colorado courts, with the exception of the court of appeals’ decision in this case, have never interpreted the language of the statute as precluding trial courts from considering a marketability discount in valuing dissenters’ shares. We must presume that the General Assembly is aware of those cases.
Despite the national trend to eliminate the marketability discount and the 1999 amendments to the Model Business Corporations Act (“MBCA”), also eliminating marketability discounts, the Colorado General Assembly has made no movement to change the Colorado statute. In my view, we cannot infer from any legislative history surrounding the dissenters’ rights statute that the General Assembly has or would mandatorily exclude the use of marketability discounts in arriving at valuation.
Hence, absent a clear legislative declaration, an interpretation of the term “fair value” that essentially gives a shareholder more money for its shares because, of a merger than the shareholder would have received immediately prior to the corporate action does not, in my view, comport with the language of the statute or with this state’s prior case law.
A. Colorado Case Law
For over a decade, Colorado courts have interpreted “fair value” to permit consideration of the lack of marketability of the stock. In 1988, the court of appeals evaluated “fan-value” as used in the 1986 dissenters’ rights statute. Walter S. Cheesman Realty Co. v. Moore, 770 P.2d 1308, 1311 (Colo.App.1988). The statute then defined “fair value” as:
[T]he value of shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of such corporate action, unless such exclusion would be inequitable.
§ 7-4-124(l)(c), 3A C.R.S. (1986). The 1986 statute is substantially identical to the eur-*370rent statute, except for the addition of the phrase “with respect to a dissenter’s shares.”19 See § 7-113-101(4), 2 C.R.S. (2002). In Cheesman Realty, the court found that the term encompassed even something broader than “fair market value.” 770 P.2d at 1311. The court envisioned that a determination of “fair value” would require a consideration of “all relevant value factors, the most important of which are market value, investment or earnings value, and net asset value.” Id. (emphasis added). Because the court found that fair value was not susceptible to a precise mathematical formula, the court found that trial courts would have to determine the value to place on each factor on a case-by-case basis. Id.
Again in 1992, the court of appeals evaluated “fair value” under the 1986 definition in deciding whether the fixed redemption price set in a corporation’s articles of incorporation precluded a dissenting shareholder from obtaining fair value for his preferred stock. Breniman v. Agrie. Consultants, Inc., 829 P.2d 493, 495 (Colo.App.1992). The court determined that “ ‘fair value’ is akin to fair market value, which is the value a shareholder would receive for his stock if he were able to sell it in an arms-length transaction.” Id.
In 1997, the court of appeals again addressed the applicability of a marketability discount in a dissenters’ rights action. WCM Indus., Inc. v. Trustees of the Harold G. Wilson 1985 Revocable Trust, 948 P.2d 36, 38-40, (Colo.App.1997). The court followed its precedent in finding that a determination of fair value requires courts to consider “all relevant factors” and that “a marketability discount may, in appropriate circumstances, be applied, but that such a determination is a factual one that must be made on an ad hoc, case-by-case basis.” Id. at 39 (emphasis in original). Citing WCM Industries, the court of appeals again held that trial courts should evaluate the applicability of the marketability discount in each case. M Life Ins. Co. v. Sapers & Wallack Ins. Agency, Inc., 40 P.3d 6,13 (Colo.App.2001).
There can be no question that, up until the court of appeals’ decision in this case, no Colorado court had interpreted the existing statute as precluding application of a marketability discount.
B. No Legislative Response
Of course, the General Assembly is presumed to know of this authority. See Vaughan v. McMinn, 945 P.2d 404, 409 (Colo.1997) (noting that the legislature is presumed to know of judicial precedent in an area of law when it legislates in that area). However, the General Assembly has taken no step to interfere with the courts’ application of marketability discounts in dissenters’ rights actions. Indeed, the General Assembly considered the statute and made substantive changes in 1993 and again in 1996 without addressing the marketability discount.
C. The National Trend
The national and scholarly trend toward the elimination of the marketability discount has been evolving for over a decade. The leading Delaware case to which the majority cites in supporting the elimination of the marketability discount across the country was decided in 1989 — prior even to Colorado’s 1993 amendments to the dissenters’ rights statute. Maj. op. at-(discussing Cavalier Oil Corp. v. Harnett, 564 A.2d 1137 (Del.1989)). The American Law Institute published its interpretation of “fair value,” eliminating marketability discounts in 1994, and again, when the General Assembly considered the statute in 1996, it made no move to comport the Colorado statute with the A.L.I. modification. A.L.I., Principles of Corporate Governance: Analysis and Recommendations § 7.22(a) (1994).
In fact, even though Colorado’s corporations code is based largely on the MBCA, the General Assembly explicitly rejected some MBCA changes during this same time frame. The General Assembly did not adopt the 1999 changes that abolished illiquidity of stocks from the valuation process.20
*371Unlike the majority, I take from the General Assembly’s inaction an inference that it intended the existing statute, as then being interpreted by the courts, to remain in place. Similarly, I do not infer that because the legislature has adopted most provisions of the Act, it would also adopt the Act’s position on marketability discounts. Indeed, Colorado’s definition of “fair value” is no longer verbatim to the MBCA’s definition, so we cannot infer that the intent of our legislature and the intent of the Model Act drafters exactly comport. See Copper Mountain, Inc. v. Poma of Am., Inc., 890 P.2d 100, 106 (Colo.1995) (holding the court can accept the intent of the drafters of a uniform act as the intent of the legislature by the General Assembly’s verbatim enactment of the uniform act’s provisions).
Actually, there is an equally plausible inference that can be derived from our General Assembly’s actions with regal'd to the 1996 amendments to the dissenters’ rights statute. In 1996, the General Assembly excluded shareholders with shares in a company that is either publicly traded or where there are more than 2,000 shareholders from the dissenters’ rights statute. Ch. 248, sec. 30, § 7-113-102(1.3), 1996 Colo. Sess. Laws 1310, 1321. Testimony regarding the enactment of the change supports the change on the grounds that there is an existing market for shares of publicly traded companies that determines the value of those shares, and therefore, it makes most sense to let the market be the mechanism by which the shares are valued, rather than a mechanism of dissent negotiations or court actions. Hearings on H.B. 96-1285 Before the House Comm, on Bus. Affairs & Labor, 60th Gen. Assemb. (Feb. 15, 1996) (statement of Anthony Von Westrum, Colo. Bar Ass’n, Bus. Law Section). The enactment of that legislation was based on a premise that the market value for shares is the best value. It would not make sense to conclude that the General Assembly wanted the market to value stocks for publicly traded companies or where greater than 2,000 shareholders exist, but not where the stock is illiquid. The General Assembly’s actions could be interpreted as a conclusion that shareholders ought to receive the market value for their shares: either established by the market itself or, if necessary, by the court.
Hence, at the point at which the General Assembly was considering the 1996 amendments, the national trend against discounts was well under way. The American Law Institute endorsed valuation without discounts in 1994, and the Delaware Supreme Court decided the case that spawned the debate in 1989. Similarly, our court of appeals had already issued three opinions that supported use of broad valuation techniques, including marketability. Our General Assembly, and the various groups that monitor the need for changes in the law, did not use the occasion of the 1996 amendments to amend the statute in order to join the group of states opting against discounts. Additionally, the General Assembly, in the wake of the more recent court of appeals’ decisions permitting the consideration of marketability in valuation, has not taken steps, as other states have, to curb the use of marketability discounts in the valuation process by adopting the 1999 MBCA amendments. See 2001 Conn. Acts 01-199 (Reg.Sess.) (amending Conn. Gen.Stat. § 33-855 (2001)); 2002 Iowa Legis. Serv. 1154 (West) (effective Jan. 1, 2003) (amending Iowa Code § 490.1301 (1999)); 2001 Me. Legis. Serv. 640 (West) (effective July 1, 2003) (adding Me.Rev.Stat. Ann. tit. 13-C, § 1301(4)); 2000 Miss. Laws ch. 469, § 28 (amending Miss.Code Ann. § 79-4-13.01(4) (1999)); 2002 W. Va. Acts ch. 25 (adding W. Va.Code § 31D-13-1301 (2002)). The conundrum is that we are assuming that by excluding shareholders who have access to a market for their shares from dissenters’ rights, the General Assembly simultaneously granted shareholders who do not have access to a market something of a windfall. In my view, the only clear inference that we can draw from the amendments is a preference for market valuation.
D. Current Statutory Language
Our statute currently provides that the shares are valued “immediately before the *372effective date of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action except to the extent that exclusion would be inequitable.” § 7-113-101(4), 2 C.R.S. (2002).
Without imposition of a marketability discount, the amount the dissenting shareholder will receive for his shares will exceed that which he would have received had he sold his stock for some unrelated reason prior to the corporate action. An investor seeking a minority interest in a closely held corporation typically discounts the amount he is willing to pay, because the minority shares represent a relatively illiquid investment. Maj. op. at 360. An investor would not buy minority shares in a close corporation without accounting for the relative illiquidity of the stock. So, in any arms-length transaction that might precede corporate change triggering dissenters’ rights, the shareholder receives only that amount that an investor is willing to pay — taking into account the illiquidity of the asset. Consequently, in a situation where that same shareholder is exercising dissenters’ rights, he will collect a windfall.
Immediately before the corporate change here, if Lindoe had tried to sell its shares, the buyer would most certainly have negotiated a discount in price to account for the illiquidity of the shares. Lindoe, as a minority shareholder, had to expect the value of shares would reflect the lack of a market for them.
The majority opines that windfall is acceptable since the dissenting shareholder in a corporate action is not a “willing” seller. The underlying policy question is whether the General Assembly intends to penalize corporations for undertaking corporate change with less than unanimous shareholder approval by rewarding dissenting shareholders with a windfall. Although that would be a legitimate policy choice, I do not see the General Assembly as having made it.
Leaving marketability in the determination seems most fair to both parties — as the shareholder gets what he expected out of his investment and the corporation is not unnecessarily penalized for corporate change. The appraisal remedy found in the dissenters’ rights statute continues to protect the interests of the minority shareholder even with the application of the marketability discount because the shareholder is able to collect the value of his shares.
The notion that clarity and predictability are well served by narrowing the number of factors a trial court must consider has obvious merit. I would only add that the real struggle is in arriving at value for the closely-held entity in the first place. The elimination of discounts from the formulation is certainly a move toward greater predictability, but does not change the fact that value is almost always disputed, with both parties’ experts relying on a myriad of other considerations and calculations. In sum, under the language of the present statute, it is my view that a marketability discount can be applied by the trial court if that would contribute to ascertainment of a “fair value” assessment.
E. Conclusion
However persuasive this court views the national trend away from applying marketability discounts, and the amendments to the A.L.I. treatise and the MBCA, the legislature has not given any indication that it seeks to eliminate the discount. As indicated above, the General Assembly has taken no action despite the backdrop of over a decade of Colorado case law allowing the discount and national trends eliminating the use of the discount. I hesitate to assume that our General Assembly shares the intent of the MBCA drafters, particularly in light of the fact that the legislators twice amended the statute since these trends began and saw fit not to make any change to the “fair value” language. To the contrary, there is some indication that the legislature did make an amendment that recognized its preference for a market valuation. Excluding a marketability discount from the valuation process grants minority shareholders a windfall that I am disinclined to bestow absent clear legislative intent.
Accordingly, I respectfully dissent from the majority opinion and would reverse the court of appeals’ decision.
*373I am authorized to state that Justice MARTINEZ and Justice COATS join in this dissent.

. The majority agrees that addition of the phrase had no substantive effect. Maj. op. at 363.

. The majority opinion notes that the General Assembly waited eight years to adopt the Model Act and nine years to adopt the Revised Model Act. Maj. op. at 368, n. 17. I would suggest only *371that during that hiatus, Colorado continued to apply the corporations code as it then stood and did not presage adoption of the Acts by court case.