Adams v. R.C. Williams & Co.
| Citation | 158 A.2d 797,39 Del.Ch. 61 |
| Court | Court of Chancery of Delaware |
| Decision Date | 25 January 1960 |
| Parties | Ernestine M. ADAMS, Valena T. Briggs, Emmet Byrne, Oswald E. Davies, Frederick W. Diener, Donald B. Hilliker, Mildred A. Hilliker, Carl E. Kastner, H. Lorene Kingsley, Welles V. Moot, Jr., Howard L. Nicholson, Theodore Peters, Esther T. Sahlin, and Frank J. Sindele, Petitioning Stockholders, v. R. C. WILLIAMS & COMPANY, Inc., a New York Corporation, Defendant. Milton W. AMSTER, Anthony Bachetti, Betty Bolognini, Rinaldo Bolognini, Mario Calamai, Emelia Calamai, Henry J. Delay, Elsie C. Dye, Roberts E. Fuller, Lasser Brothers, Jessica Lotz, Jessie M. Mackenzie, Jean C. Mollitz, Joseph R. Reilly, Tweedy, Browne & Reilly, and Mitchel J. Valicenti, Petitioning Stockholders, v. R. C. WILLIAMS & COMPANY, Inc., a New York Corporation, Defendant. |
Andrew B. Kirkpatrick, Jr. of Morris, Nichols, Arsht & Tunnell, Wilmington, for petitioning stockholders in Civil Action No. 978.
Arthur J. Sullivan of Morris, James, Hitchens & Williams, Wilmington, for petitioning stockholders in Civil Action No. 993.
Richard F. Corroon of Berl, Potter & Anderson, Wilmington and Thomas W. Kelly and Clifford B. Storms of Breed, Abbott & Morgan of New York City for defendant R. C. Williams & Co., Inc.
SEITZ, Chancellor.
This is the decision on the exceptions of certain stockholders ('stockholders') and the resulting corporation ('defendant') to an appraiser's final report determining the value of shares held by stockholders dissenting from a merger.
Old Judge Foods Corporation ('Old Judge') was merged into R. C. Williams & Co., Inc., the defendant herein, effective December 9, 1957. The dissenting stockholders held only the $25 and the $10 par cumulative convertible preferred shares of Old Judge. It is tacitly agreed that differences between the two classes can be ignored for the purpose of disposing of the present exceptions.
The appraiser fixed the value of the $25 par preferred of Old Judge at $9.71 per share and fixed the $10 par preferred at $3.88 per share. The stockholders say that such value should have been $15 and $6, respectively, while the defendant says the values should have been $4.49 and $1.79 respectively.
The stockholders claim that the appraised value must be at least the par value of the shares defendant exchanged for their stock pursuant to the terms of the merger.
Under the terms of the merger the defendant, a New York corporation, issued six-tenths of a share of its previously issued $25 par stock as full paid and non-assessable in exchange for each share of the Old Judge $25 preferred and issued 24/100 per cent of its new $25 par stock for each share of the Old Judge $10 preferred. Moreover, by a side agreement, defendant's parent offered to buy in a portion of the new $25 stock issued by the defendant in the merger at a price of $25 per share. Thereafter the defendant increased its own capital account by $25 for each share of its $25 par stock issued in exchange for the Old Judge preferred. It also increased its asset account by an equivalent sum, entering the amount by which the overall issuance in its capital exceeded the book value of the Old Judge assets as 'Excess of cost over net equities of companies acquired less amortization'.
Defendant corporation, which is a New York corporation, contends that under New York law a corporation can in the course of a merger issue new shares for less than their par. It says that even if this is not so, the value fixed by the directors must be deemed to include elements of value resulting from the merger and thus involve a different standard from that binding on the appraiser. The appraiser in effect agreed with defendant.
The appraiser had a duty to determine the fair value of the particular shares of Old Judge at the merger date. Assuming that the directors of a New York corporation have an obligation in a merger case to obtain a value equivalent to the par value of the shares to be issued under the terms of a merger, it does not automatically follow that the par value of the shares issued reflect the fair value of the shares of the merged corporation exclusive of any value resulting from the proposed merger.
Looking solely at the going concern value of the stock of the merged corporation, it could well be that its per share fair value would be either more or less than the par value of the shares issued therefor. From the point of view of the corporation resulting from the merger, the business acquired could have a value which it would not possess when viewed apart from the resulting corporation's overall operation. I take judicial notice of the fact that a corporation sometimes pays a premium to obtain a business which it feels will fit in with its needs or plans or which will give it a large loss to offset against profits for tax purposes. Whether the value of the stock of Old Judge, when compared with the value of the stock exchanged therefor, is so inadequate as to be actionable is of no concern to these stockholders.
I therefore conclude that, while relevant, the amount of the stock issued under the terms of the merger is not conclusive evidence of the value of the shares of the merged corporation. Viewed against the factors hereafter considered (e. g., earnings, market value), I think it is meaningless for our purposes. The exception on this ground is overruled.
In considering other exceptions of the parties it is pertinent to set forth the appraiser's tabulation of figures going to make up his final determination:
Value Factor Value Found Weighting Result
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Asset 17.96 30% 5.38
Market 7.00 20% 1.40
Dividend or Yield Value 5.50 25% 1.37
Earnings 6.24 25% 1.56
Value per share of $25 par preferred 9.71
Value per share of 10 par preferred 3.88
Both sides attack the earnings value as found by the appraiser. The stockholders say that it is too low and the defendant says there is none at all. The stockholders claim that one of the underlying errors committed by the appraiser was to treat the preferred stock for evaluation purposes as though it were a common stock. The appraiser did this because he felt that the cumulative preferred was so far in arrears that for all practical purposes it should be treated as common in connection with the application of future earnings. I do not find it necessary to consider this factor in resolving the matter.
I return to the question of earnings. The net income or loss for each of the eleven years before the merger is as follows (losses are in parenthesis):
1947 $287,992.89
1948 $153,157.45
1949 $165,313.42
1950 $123,964.60
1951 $208,491.15
1952 ($320,479.62)
1953 ($620,120.59)
1954 $4,507.69
1955 ($1,413,356.50)
1956 ($587,796.34)
1957 $15,295.21
The operating profit or loss for each of those years is as follows (losses in parenthesis):
1947 $378,405.36
1948 $151,333.79
1949 $497,372.05
1950 $508,841.10
1951 $157,497.62
1952 ($10,039.56)
1953 ($181,694.42)
1954 $114,248.56
1955 ($605,912.52)
1956 $158,780.16
1957 $103,618.61
It appears that the appraiser, in order to arrive at an average earnings figure to be employed in projecting future earnings, took only the two years immediately preceding the merger (1956 and 1957). He then eliminated from these years certain items which depressed the value for those years. From Old Judge's 1956 net loss of $587,796.34, he eliminated a loss on coffee futures of $601,760.25, and thus came up with a net profit for 1956. He increased the net profit of $15,295 for 1957 by adding the sum of $105,000 representing administrative savings which he felt would be effected. The appraiser reached a $1.56 per share average earnings based upon his adjusted 1956 and 1957 figures.
The corporation takes violent exception to the treatment of some of those items by the appraiser in reconstructing the earnings for the two year period. I need not pass upon the propriety of this aspect of the matter because it appears that the appraiser limited himself to a two year period in determining average earnings for capitalization purposes. I think this was unwarranted. See In re General Realty & Utilities Corp., 29 Del.Ch. 480, 52 A.2d 6. An important purpose behind the practice of taking the average of several years earnings for the purpose of capitalizing earnings is to balance extraordinary profits and losses. See Dewing, Financial Policy of Corporations (5th ed.), Page 376; and see Sporborg v. City Specialty, Del.Ch., 123 A.2d 121. Past experience represented by the actual figures are of prime importance. Compare Cottrell v. Pawcatuck Corp., Del., 128 A.2d 225.
When the average net earnings are taken for the last six years before the merger they show a net loss. The same result is found for the eleven years before the merger. And of still greater importance, a loss is shown for these periods even when the appraiser's adjusted 1956 and 1957 figures are used.
One reason the appraiser limited himself to the two year period was because he felt that losses for the prior years arose from the unstable nature of the coffee market which he concluded had been stabilized. I do not believe that the so-called stabilization of the coffee market constituted a reason to choose only a two year...
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