Bell v. Kirby Lumber Corp.

• Decision Date: 20 February 1980
• Citation: 413 A.2d 137
• Parties: Edith K. BELL et al., Petitioners Below-Appellants/Cross-Appellees, v. KIRBY LUMBER CORPORATION, Respondent Below-Appellee/Cross-Appellant.
• Court: Supreme Court of Delaware

Page 137

413 A.2d 137

Edith K. BELL et al., Petitioners Below-Appellants/Cross-Appellees, v. KIRBY LUMBER CORPORATION, Respondent Below-Appellee/Cross-Appellant.

Supreme Court of Delaware.

Submitted Jan. 9, 1980.

Decided Feb. 20, 1980.

Upon appeal from Court of Chancery. Affirmed in part; reversed in part.

James F. Burnett, Wilmington (argued) of Potter, Anderson & Corroon, Wilmington, for petitioners below-appellants/cross-appellees.

William O. LaMotte, III and A. Gilchrist Sparks, Wilmington (argued), S. Samuel Arsht and Lawrence A. Hamermesh of Morris, Nichols, Arsht & Tunnell, Wilmington, for respondent below-appellee/cross-appellant.

Before McNEILLY, QUILLEN and HORSEY, JJ.

McNEILLY, Justice:

This is an appeal and cross-appeal from the Vice-Chancellor's denial of exceptions taken by certain minority stockholders (stockholders) and by the surviving corporation, Kirby Lumber Company (Kirby) to the appraiser's final report following a short form merger (8 Del.C. § 253). Alfred Folweiler, another stockholder, appeals from the rejection by the Vice-Chancellor of his timely letter addressed to Kirby which the Vice-Chancellor ruled was inadequate to constitute a demand for appraisal.

The factual and historical background leading to the merger and cash out of Kirby's minority stockholders by Santa Fe Industries, Inc. (Santa Fe) are detailed throughout the Vice-Chancellor's opinion. 395 A.2d 730 (1978). Reference is made to the Vice-Chancellor's opinion here to avoid unnecessary repetition.

I

During the fall of 1973 Santa Fe, then owner of approximately 95% of the outstanding stock of Kirby, in contemplation of acquiring the remaining stock of Kirby, commissioned W. D. Davis of the firm of Appraisal Associates to make an appraisal of Kirby's business and assets, and retained the investment banking firm of Morgan Stanley & Company, Incorporated (Morgan Stanley) to furnish an opinion of the fair market value of the Kirby minority stock, approximately 25,000 shares of a total outstanding of 500,000. The Davis appraisal of assets as of December 31, 1973, was $320,000,000, and the Morgan Stanley opinion of the per share fair market value of the Kirby minority stock was $125. ¹ Based upon these reports and related data Santa Fe determined that a cash out of the Kirby minority was feasible and proceeded to effect the 8 Del.C. § 253 short form merger as of July 31, 1974. The owners of approximately 5000 Kirby shares dissented and properly demanded an appraisal under 8 Del.C. § 262. The appointed appraiser concluded the per share value of the Kirby minority stock to be $254.40, based upon an earnings value of $120, assets value of $456 with assigned weight of 60% to earnings and 40% to assets. Basically the greatest area of disagreement between the parties lies in the appraisers' valuation of assets and the weight assigned to assets and earnings in arriving at the fair value per share of Kirby minority stock on the date of merger. The entire fairness and strict judicial scrutiny rule of Sterling v. Mayflower Hotel Corp., Del.Supr., 93 A.2d 107 (1952); Singer v. Magnavox Company, Del.Supr., 380 A.2d 969 (1977); and Tanzer v. International General Industries, Inc., Del.Supr., 379 A.2d 1121 (1977), as it applies to the merger itself is not before the Court in this appeal. The fiduciary duty aspect of this merger has been litigated in the federal courts, ² but there is no issue here involving a violation of any fiduciary duty owed the minority by the majority in effecting the merger. Therefore, the assessment of damages does not include consideration by the Vice-Chancellor of possible rescission, monetary damages based upon factors beyond the scope of statutory appraisal, or other relief deemed appropriate in the discretion of the Court under Singer. Of primary consideration here is our inquiry into fair price within the context of entire fairness under the appraisal statute in assessing damages to be paid the minority as a result of their being cashed out. The stockholders contend that the entire fairness, close judicial scrutiny rule in this parent/subsidiary merger requires the Court to assess damages on the basis of a per share value of the stock as negotiated in a hypothetical third party arms length transaction in which the vast natural resource assets of Kirby would control. Kirby on the other hand would have earnings control on the traditional appraisal going concern basis, contending that the value of the shares depends upon the success of Kirby's manufacturing and marketing of lumber, plywood and other wood products for which the timber acreage provides a sustained yield.

II

The stockholders' first argument is that because Santa Fe controlled the decision to cash out the minority stockholders of Kirby, the Vice-Chancellor erred by permitting appraisal under the short form merger statute to be used by the parent company as an instrument to avoid its fiduciary duty of entire fairness to the stockholders under Sterling v. Mayflower Corp., supra; Singer v. Magnavox Company, supra; and Tanzer v. International General Industries, Inc., supra. Kirby does not contest the applicability of the fiduciary duty of entire fairness by the parent to the minority, but does contend that to follow a standard of damages based upon an amount all shareholders would have received in a third party sale negotiated at arms length, is an unwarranted expansion of the appraisal remedy. Kirby claims this calls for an aliquot valuation of shares based upon a sale or liquidation rather than upon a determination of stock value in a going concern which is the traditional standard established by Tri-Continental Corp. v. Battye, Del.Supr., 74 A.2d 71 (1950) and its progeny.

Santa Fe, as the holder of 95% of Kirby's outstanding stock, had the power to do with Kirby whatever it chose. Based upon the Davis appraisal of assets it could have liquidated Kirby and realized approximately $670 per share for each stockholder. It could have negotiated a merger with an unrelated corporation; or it could have permitted the minority to continue in the corporation for better or for worse. Instead Santa Fe chose to cash out the minority because the price of the minority stock was as low as Santa Fe management could anticipate under existing market conditions. The stockholders claim this to be a forced sale at a distress price, at a time immediately following a period of rapid increase in the value of Kirby's assets, and prior to the time of a period of contemplated "phenomenal" growth. This argument is appealingfrom the stockholder's viewpoint because the majority engineered the transaction at a time when it appeared to Santa Fe management that it was unlikely that the price of the Kirby minority shares would ever be less than it was at that time. The stockholders were effectively locked in. Aside from a tender offer for $65 per share and isolated transactions in the area of $85-95 the Kirby stock had no market but paid $3 per share dividends. In such a situation there is substantial likelihood that the takeout transaction may result in a low value appraisal. See Jonathan H. Holman, 1978 Ann. Survey of American Law, 279, 296 (1978); Brudney & Chirelstein, Fair Shares In Corporate Mergers and Takeovers, 88 Harv.L.Rev. 297, 304 (1974).

The stockholders argue also that the application of the arms length standard urged by them would not result in a wholesale change in the mechanics of arriving at value by appraisal but could be accomplished by a reevaluation of weighting the traditional value factors, assigning controlling weight to asset value and negligible weight to earnings. The stockholders suggest in this case 90% to assets and 10% to earnings, something only slightly less than full liquidation. Kirby would weigh earnings over assets.

In Tri-Continental Corp. v. Battye, supra, this Court said:

"Section 61 of the General Corporation Law Code 1935, § 2093, provides that upon the merger of a corporation, stockholders who object to the merger and who fulfill the statutory requirements to register their objection shall be paid the value of their stock on the date of the merger, exclusive of any element of value arising from the expectation or accomplishment of the merger."

"The basic concept of value under the appraisal statute is that the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern. By value of the stockholder's proportionate interest in the corporate enterprise is meant the true or intrinsic value of his stock which has been taken by the merger. In determining what figure represents this true or intrinsic value, the appraiser and the courts must take into consideration all factors and elements which reasonably might enter into the fixing of value. Thus, market value, asset value, dividends, earning prospects, the nature of the enterprise and any other facts which were known or which could be ascertained as of the date of merger and which throw any light on future prospects of the merged corporation are not only pertinent to an inquiry as to the value of the dissenting stockholders' interest, but must be considered by the agency fixing the value.

The rule as stated requires that certain obvious conclusions be drawn. Thus, since intrinsic or true value is to be ascertained, the problem will not be settled by the acceptance as the sole measure of only one element entering into value without considering other elements. For example, as was specifically held in Chicago Corporation v. Munds, (20 Del.Ch. 142, 172 A. 452) supra, market value may not be taken as the sole measure of the value of the stock. So, also, since value is to be fixed on a going-concern basis, the liquidating value of the stock may not be accepted as the sole measure."

"A great deal of argument in this cause has turned around the phrase 'net asset value' which is simply a mathematical figure...