Athlon Sports Commc'ns, Inc. v. Duggan

• Decision Date: 08 June 2018
• Docket Number: No. M2015-02222-SC-R11-CV,M2015-02222-SC-R11-CV
• Citation: 549 S.W.3d 107
• Parties: ATHLON SPORTS COMMUNICATIONS, INC. v. Stephen C. DUGGAN et al.
• Court: Tennessee Supreme Court

549 S.W.3d 107

ATHLON SPORTS COMMUNICATIONS, INC.

v.Stephen C. DUGGAN et al.

No. M2015-02222-SC-R11-CV

Supreme Court of Tennessee, AT NASHVILLE.

October 11, 2017 Session

FILED June 8, 2018

John R. Jacobson and W. Russell Taber III, Nashville, Tennessee, for the Defendant/Appellants, Stephen C. Duggan, Daniel R. Grogan, and Robert Kelly Grogan.

Paul S. Davidson and Laura P. Merritt, Nashville, Tennessee, for the Plaintiff/Appellee, Athlon Sports Communications, Inc.

Holly Kirby, J., delivered the opinion of the Court, in which Jeffrey S. Bivins, C.J., and Cornelia A. Clark, Sharon G. Lee, and Roger A. Page, JJ., joined.

Holly Kirby, J.

We granted permission to appeal in this case to address the methods by which a trial court may determine the "fair value" of the shares of a dissenting shareholder under Tennessee's dissenters' rights statutes, Tennessee Code Annotated sections 48-23-101, et seq.In doing so, we overrule Blasingame v. American Materials, Inc. , 654 S.W.2d 659(Tenn.1983), to the extent that Blasingame implicitly mandates use of the Delaware Block method for determining the fair value of a dissenting shareholder's stock.We adopt the more open approach espoused in Weinberger v. UOP, Inc. , 457 A.2d 701, 712-13(Del.1983), in which the Delaware Supreme Court departed from the Delaware Block method and permitted trial courts to determine fair value by using any technique or method that is generally acceptable in the financial community and admissible in court.This approach allows trial courts to utilize valuation methods that incorporate projections of future value, so long as they are susceptible of proof as of the date of the corporate action and not the product of speculation.In this dissenters' rights case, the defendant minority shareholders were forced out of the corporation as a result of a merger, and the corporation petitioned the trial court to determine the fair value of the minority shareholders' stock.Both parties presented expert testimony regarding the valuation of the dissenting shareholders' stock, and both experts assumed that Blasingame required use of the Delaware Block method to value the stock.However, both experts also valued the dissenting shareholders' stock under more modern approaches, such as the discounted cash flow method.After a bench trial, the trial court discredited the testimony of the dissenting shareholders' expert and credited the testimony of the corporation's expert.The trial court's order indicates that it may have based its decision on the premise that Blasingame compelled use of the Delaware Block method to determine stock value.Consequently, we remand to the trial court to reconsider its determination on valuation in light of our decision to partially overrule Blasingame .

FACTUAL AND PROCEDURAL BACKGROUND¹

Plaintiff/AppelleeAthlon Sports Communications, Inc.("Athlon"), was formed in 1967 and incorporated in 1972.It is a private, closely-held corporation with its principal place of business in Nashville, Tennessee.Athlon publishes special-interest consumer sports magazines, websites, and other branded products, including sports annuals, newsletters, and handbooks.It also sells authenticated sports memorabilia to consumers and wholesale clients.For over fifty years, Athlon enjoyed steady profits until it fell victim to the global economic downturn of the late 2000s.²In re Fannie Mae 2008 Securities Litigation , 742 F.Supp.2d 382, 391(S.D.N.Y.2010)(describing the "well documented" events surrounding the Great Recession).

Defendant/AppellantStephen Duggan is a certified public accountant and an executive with magazine publishing experience.³After learning of Athlon's financial difficulties, Mr. Duggan conceived a turnaround plan for the company.He proposed a monthly sports publication called " Athlon Sports ," which would be inserted and distributed in newspapers.Like Athlon's other sports publications, the proposed insert would generate revenues through advertising sales.

In March 2010, Athlon accepted Mr. Duggan's proposal and hired him to implement the Athlon Sports newspaper-insert project.In addition, Mr. Duggan invested $1.5 million in the company and in return received 15% of the company's ownership shares, or 222,100 shares of Athlon stock.He was also eligible to receive additional shares of restricted stock amounting to an additional 10% ownership in Athlon; the number, timing, and vesting of the restricted shares were based upon EBITDA (earnings before interest, taxes, depreciation, and amortization) performance targets from 2010 to 2014.⁴

Around the same time, Athlon retained a CPA firm, Lattimore Black, Morgan & Cain ("Lattimore Black"), to conduct a valuation of Athlon.The valuation was obtained in part to establish a basis price for Mr. Duggan's restricted shares for tax purposes.The valuation was intended to be available for other purposes as well, since there had been no valuation of Athlon since its business began to decline.

In a report dated April 22, 2010, Lattimore Black placed Athlon's enterprise value at $8.1 million.It determined that the fair market value of Athlon's common share equivalents was $1.85 per share, and the fair market value of the restricted stock was $.98 per share.⁵Lattimore Black's valuations were based in part on probability estimates of the success of the Athlon Sports project.

Over the next several months, Athlon secured the new infrastructure necessary to support the Athlon Sports newspaper-insert project.It found a manufacturer for the insert, negotiated contracts, and made other preparations for the new endeavor.Finally, the Athlon Sports launch took place in October 2010.It was a success, and Athlon Sports became a nationally-distributed sports magazine with a monthly rate base of 7 million copies.During 2011, while Mr. Duggan was still President and CEO, the Athlon Sports rate base grew to over 9 million copies per month, a figure that was touted in Athlon company documents.Media Industry Newsletter named Mr. Duggan 2011 Publisher/CEO of the Year.

Unfortunately, the increased circulation and other successes did not translate into higher advertisement revenue for Athlon; the ad revenue lagged substantially behind pre-launch projections.This precipitated a significant cash-flow shortfall for Athlon.

To raise the capital necessary for payroll and other operating expenses, Athlon was forced to take extraordinary measures.By October 2011, a year after the launch of Athlon Sports , Athlon had sold its main asset—the building that had housed the business for twenty years—for about $3.9 million.The building had served as the collateral for Athlon's approximately $1 million line of credit, so the proceeds of the sale were used to pay off the line of credit.The remaining proceeds of the building sale were retained for working capital and to fund the ongoing business.All of Athlon's key employees, except Mr. Duggan, took pay cuts.⁶As a further measure, Athlon surrendered its key-man life insurance policies on seventy-five-year-old Spencer Hays, the chairman of the board and controlling shareholder.This decision relieved the company from the obligation of paying the hefty insurance premiums and also allowed it to recover the cash value of the policies.⁷

The parties dispute whether Mr. Duggan was hindered from pursuing outside capital to address Athlon's cash flow issues during early 2011.Regardless, it is undisputed that, beginning in October 2011, Mr. Duggan was permitted to do so.

In connection with his effort to seek outside capital, Mr. Duggan oversaw the preparation of a Confidential Information Memorandum (CIM) for Athlon to use to attract would-be investors.In the CIM, the projections for Athlon's future were quite optimistic: "Based on the investments made since 2010, Athlon is poised for strong multi-year double-digit revenue growth."The CIM also asserted that Athlon was "forecasted to generate total revenue of $14.3 million in fiscal 2012, which represents year-over-year growth rate of 34.6%."Despite these rosy forecasts, the record shows that, by the time the CIM was prepared, Athlon's financial circumstances had deteriorated substantially.

On November 28, 2011, at a board of directors meeting, Athlon effectively terminated Mr. Duggan's employment.Mr. Hays asked Mr. Duggan to resign as CEO of Athlon, and Mr. Duggan did so.However, after resigning from his employed position, Mr. Duggan remained on Athlon's board of directors.

Around that same time, Mr. Hays, along with Charles Allen(chief operating officer) and Mary Dunn Vanderkooi(chief financial officer), formed an Ad Hoc Strategic Alternatives Committee("the Committee") to explore options for returning Athlon to profitability.The Committee devised a so-called "Plan of Merger" to form a new corporation.Under the merger plan, Athlon would merge with a newly-created Tennessee corporation, Athlon Merger Subsidiary, Inc.("Merger Sub").Another newly-created Tennessee corporation, Athlon Acquisition, Inc.("Newco"), would be the sole shareholder of Merger Sub.After completion of the planned merger, the separate Merger Sub would cease to exist, leaving the Newco, also referred to as "New Athlon," as the only surviving corporation.Shares in New Athlon would be purchased via proportional investments by Mr. Hays and certain other Athlon employees.Under the merger plan, the total investment in the new corporation was expected to be $2 million, which was to provide a much-needed infusion of capital for New Athlon's ongoing business.

The Plan of Merger contemplated that some Athlon shareholders would not be invited to participate in the new corporation.⁸For this reason, the Committee anticipated that some shareholders would dissent from the planned merger.Accordingly, for the purpose of determining the value of dissenting shareholders' stock, the Committee sought a new valuation of Athlon prior to the planned merger.The...