Am. Ethanol Inc. v. Fund

• Decision Date: 05 May 2011
• Docket Number: No. 54779.,54779.
• Citation: 127 Nev. Adv. Op. 13,252 P.3d 663
• Parties: AMERICAN ETHANOL, INC., A Nevada Corporation; and AE Biofuels, Inc., a Nevada Corporation, Appellants,v.CORDILLERA FUND, L.P., A Texas Limited Partnership, Respondent.
• Court: Nevada Supreme Court

252 P.3d 663

127 Nev. Adv. Op. 13

AMERICAN ETHANOL, INC., A Nevada Corporation; and AE Biofuels, Inc., a Nevada Corporation, Appellants,

v.CORDILLERA FUND, L.P., A Texas Limited Partnership, Respondent.

No. 54779.

Supreme Court of Nevada.

May 5, 2011.

Holland & Hart LLP and Jeremy J. Nork and Ethan J. Birnberg, Reno, for Appellants.McDonald Carano Wilson LLP and Craig A. Newby and William A.S. Magrath II, Las Vegas, for Respondent.Before CHERRY, GIBBONS and PICKERING, JJ.

OPINION

By the Court, CHERRY, J.:

In this appeal, we examine the definition of “fair value” as prescribed by the stockholder right-to-dissent statutes. We adopt a flexible approach in determining fair value, whereby the district court should evaluate a number of relevant factors in determining fair value.

Furthermore, we determine who bears the burden of proving the fair value of a stockholder's corporate shares in a stockholder's right-to-dissent appraisal action. We conclude that in such an appraisal proceeding, both the dissenting stockholder and the corporation have the burden of proving their respective valuation conclusions by a preponderance of the evidence. In evaluating the fair value, even if neither party satisfies its burden, the district court ultimately must use its independent judgment to determine the fair value.

FACTS

In 2006, respondent Cordillera Fund, L.P., purchased a total of 583,334 shares of series B convertible preferred stock in appellant American Ethanol, Inc., for $1,750,002, or $3 per share.¹ In July 2007, American Ethanol and appellant AE Biofuels, Inc., formalized a merger agreement, and American Ethanol notified its stockholders of their NRS Chapter 92A right to dissent. In response, Cordillera gave American Ethanol notice of its intent to dissent and demand payment for its total shares. The other American Ethanol stockholders approved the merger, and on December 7, 2007, the articles of merger were filed with the Nevada Secretary of State.

The following month, Cordillera sent appellants a demand for payment pursuant to NRS 92A.440. After appellants refused to tender payment, citing untimeliness, among other things, Cordillera filed a complaint for declaratory and injunctive relief in the district court. See NRS 92A.460. Specifically, Cordillera requested a declaration of its right to payment for its shares in American Ethanol, an injunction compelling appellants to comply with Nevada's dissenters' rights statutes, and reasonable attorney fees and costs. Appellants contested the timeliness of Cordillera's demand, and apparently, a secondary issue was also raised—the proper valuation of the shares.² The timeliness issue was heard first, and after a one-day trial, the jury found that Cordillera exercised its dissenter's right in a timely matter. Thus, the only remaining issue for the district court to determine was the fair value of Cordillera's shares of stock as of December 7, 2007, the date of the merger. See generally NRS 92A.490.

Neither Cordillera nor appellants provided an appraisal of the shares' fair value, and the district court directed appellants to either deliver payment or an offer for the “fair market value” of the shares plus accrued interest. ³ See NRS 92A.460; NRS 92A.470. The district court ordered that if the payment or the offer was not accepted by Cordillera, then Cordillera must notify appellants of its estimate of the shares' fair value no later than 30 days after compliance by appellants. See NRS 92A.480. The district court provided that if there remained a dispute between the parties concerning the fair value of shares, then the court would determine that value.

Thereafter, appellants offered Cordillera $0.15 per share. Cordillera rejected the offer. Subsequently, Cordillera gave notice to appellants of its estimate of the fair value of the stock at $3 per share. The parties proceeded to trial because no agreement as to fair value could be reached.

At trial, Cordillera produced three Securities and Exchange Commission (SEC) documents to support its contention that the fair value of the stock on the merger date was $3 per share, including one that indicated that $3 per share was the offering price of the series B preferred stock as of the date of merger. Appellants provided testimony that the book value per share was representative of the fair value and thus, $0.15 per share was the appropriate payment owed.⁴

At the conclusion of the trial, the district court found that the preponderance of the evidence demonstrated that the offering price of American Ethanol stock was the most reliable showing of value, even though the offering price is not always or necessarily equivalent to the value of the stock. Moreover, the district court dismissed appellants' theory that the book value was representative of fair value in this case. Subsequently, the district court entered a judgment in favor of Cordillera and against appellants, jointly and severally, determining that a preponderance of the evidence established that the fair value of Cordillera's shares of stock at the time of the corporate merger was $1,750,002, or $3 per share. The total judgment was for $1,918,901.17, which represented the principal sum of $1,750,002, plus prejudgment interest of $168,899.17. Appellants appealed.

On appeal, appellants contend that the district court abused its discretion in determining the fair value of the shares because Cordillera failed to meet its burden of proof.

DISCUSSION

NRS 92A.300–.500 governs the rights of stockholders who dissent from certain corporate actions, such as mergers. Cohen v. Mirage Resorts, Inc., 119 Nev. 1, 10, 62 P.3d 720, 726 (2003). These statutes were “patterned after, or are identical to, the provisions of the 1984 Model Business Corporation Act.” Id. “The Model Act and Nevada's statutes are designed to facilitate business mergers, while protecting minority shareholders from being unfairly impacted by the majority shareholders' decision to approve a merger.” Id. at 10, 62 P.3d at 726–27. Thus, minority stockholders who dissent from a corporate action such as a merger are entitled to receive payment for the fair value of their shares. NRS 92A.380(1)(a).

Fair value

“Fair value” is not explicitly defined in the statutes. The relevant version of NRS 92A.320 states merely that fair value is “the value of the shares immediately before the effectuation of the corporate action to which [the stockholder] objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable.” NRS 92A.320 (2008); ⁵ see 3 Model Bus. Corp. Act Ann. § 13.01 (4th ed. 2008). Thus, as noted in the official comment to the 1984 Model Business Corporation Act, the statute leaves it to the courts to work out “the details by which ‘fair value’ is to be determined within the broad outlines of the definition.” 3 Model Bus. Corp. Act Ann. § 13.01 cmt. 3 (3d ed. 1984).

Determining fair value, “in actual practice ... is not easy.” Steiner Corp. v. Benninghoff, 5 F.Supp.2d 1117, 1123 (D.Nev.1998) (applying Nevada law). “One of the first questions that must be addressed in any valuation study is what ‘standard of value’ the valuation study is meant to determine.” Id. In Nevada, “that standard is set by statute—the Nevada dissenters' rights statutes direct that dissenting shareholders should receive the ‘fair value’ of their shares.” Id.; see NRS 92A.320; NRS 92A.380. “Unfortunately, the statutes do not elaborate on what ‘fair value’ means, or on what should be considered in order to arrive at fair value.” Steiner, 5 F.Supp.2d at 1123. Lacking explicit statutory directive, courts typically consider “all relevant factors” when valuing dissenting stockholders' shares. Ferdinand S. Tinio, Annotation, Valuation of Stock of Dissenting Stockholders in Case of Consolidation or Merger of Corporation, Sale of Its Assets, or the Like, 48 A.L.R.3d 430 § 3(a) (1973).

In the related context of determining “fair cash value” under former NRS 78.510, this court has adopted a flexible approach that looks to a number of different factors. See Southdown, Inc. v. McGinnis, 89 Nev. 184, 188–90, 510 P.2d 636, 639–40 (1973) (noting that “[t]he words ‘fair cash value’ ... have been construed by courts elsewhere to mean the intrinsic value of the dissenting shareholder's interests determined from the assets and liabilities of the corporation considered in the light of every factor bearing on value”), superseded by statute on other grounds as stated in United Ins. Co. v. Chapman Indus., 120 Nev. 745, 747–48, 100 P.3d 664, 666 (2004); see also Steiner, 5 F.Supp.2d at 1126 (“any ... factor bearing on value” would be considered in determining fair value).

Like other Model Business Corporation Act states, we conclude that, in determining “fair value, the trial court may rely on proof of value by any technique that is generally accepted in the relevant financial community and should consider all relevant factors, but the value must be fair and equitable to all parties.” Advanced Communication Design v. Follett, 615 N.W.2d 285, 290 (Minn.2000); see also Torres v. Schripps, Inc., 342 N.J.Super. 419, 776 A.2d 915, 923–24 (N.J.Super.Ct.App.Div.2001); 18 C.J.S. Corporations § 394 (2011). This flexible approach “allows the trial court to adapt the meaning of fair value to the specific facts of the case.” Pueblo Bancorporation v. Lindoe, Inc., 63 P.3d 353, 360 (Colo.2003). Burden of proof

Despite Nevada's flexible approach, appellants contend that Cordillera did not satisfy its burden of proof in establishing the fair value of its stock. Appellants' argument, however, presumes that in an appraisal matter, the burden is Cordillera's alone, a presumption not supported by the statutory language or existing Nevada caselaw.

The question of which party bears the burden of establishing the fair value of a corporation's stock at the time of merger is not expressly answered by Nevada's...