Bell v. Kirby Lumber Corp.
| Decision Date | 18 October 1978 |
| Citation | 395 A.2d 730 |
| Parties | Edith K. BELL et al., Petitioners, v. KIRBY LUMBER CORPORATION, Respondent. |
| Court | Court of Chancery of Delaware |
Exceptions to Report of an Appraiser pursuant to 8 Del.C. § 262. Exceptions denied.
Richard F. Corroon, and James F. Burnett, of Potter, Anderson, & Corroon, Wilmington, for petitioners.
William O. LaMotte, III, and A. Gilchrist Sparks, III, of Morris, Nichols, Arsht & Tunnell, Wilmington, for respondent.
BROWN, Vice Chancellor.
This is a decision on the exceptions taken by certain stockholders ("the stockholders") as well as those taken by the resulting corporation, Kirby Lumber Corporation ("Kirby") to the final report of an appraiser which determined the value of shares held by stockholders dissenting from a merger.
Kirby is a Delaware corporation founded in 1901. Its business since that time has been to convert its timber resources into lumber and plywood for purposes of sale. In 1936, as a result of a reorganization in bankruptcy, a subsidiary of The Atchison, Topeka and Santa Fe Railway Company acquired 60 per cent of the outstanding stock of Kirby. Additional purchases of Kirby stock over the years increased this majority holding to some 88 per cent by 1967. As a result of corporate restructuring in 1971, Kirby became a partly-owned subsidiary of Santa Fe Natural Resources, Inc., which in turn is a wholly-owned subsidiary of Santa Fe Industries, Inc. ("Santa Fe"). Through continued purchases, Santa Fe Natural Resources, Inc. owned approximately 95 per cent of the outstanding stock of Kirby by 1973.
In the fall of 1973 Santa Fe's management decided to investigate the feasibility of acquiring all the remaining minority stock of Kirby. To this end, Santa Fe sought to obtain an appraisal of Kirby's business and assets and eventually, after evaluating several candidates, it selected one W. D. Davis of the firm of Appraisal Associates, to make this asset appraisal. At or about the same time Santa Fe retained the investment banking firm of Morgan Stanley & Company, Incorporated ("Morgan Stanley") to furnish an opinion as to the fair market value of the Kirby minority shares.
As a result of the various evaluations and reports, Santa Fe determined to effect a short form merger of Kirby pursuant to 8 Del.C. § 253 under the terms of which the minority stockholders of Kirby would be eliminated from the surviving corporate entity in return for a payment of cash for their Kirby shares. To accomplish this, Santa Fe Natural Resources, Inc. caused the incorporation of Forest Products, Inc. ("F.P.I."), a Delaware Corporation. F.P.I. then became the parent corporation of Kirby through the issuance of 1,000 shares of the capital stock of F.P.I. to Santa Fe Natural Resources, Inc. in exchange for its 95 per cent issued and outstanding stock of Kirby. On July 30, 1974, the F.P.I. board adopted a resolution of merger pursuant to § 253 providing that F.P.I. would be merged into Kirby with Kirby surviving, and that each share of Kirby stock not owned by F.P.I. would have the right to receive $150 per share in cash in exchange therefor, or, alternatively, the right to seek an appraisal under § 262 of the Delaware General Corporation Law. Santa Fe Natural Resources, Inc., as F.P.I.'s sole stockholder, approved the merger on this same date, and it became effective July 31, 1974. The petitioning stockholders here, being the owners of some 4,000 Kirby shares, dissented and thereafter demanded and qualified for an appraisal under § 262.
Subsequently, extensive discovery was entered into by the parties and a lengthy evidentiary hearing was held before the appraiser appointed by the Court. Post-hearing memoranda were also submitted to the Appraiser, and, after a draft of his findings was first submitted to the parties, his final report was filed with the Court. Neither Kirby nor the stockholders were content with the conclusions of the Appraiser, and accordingly the present exceptions have been filed, briefed and argued. This is the decision thereon.
At the outset, it seems appropriate to set forth the parameters of disagreement before turning to the particulars on which the parties rely in support of their respective contentions. The conclusion of the Appraiser in arriving at a value for the Kirby shares as of July 31, 1974, is as follows:
Earnings $120 x 60% $ 72.00
Assets $456 x 40% 182.40
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Value per share $254.40
The valuation urged by the dissenting stockholders is as follows
Earnings $252 x 10% $ 25.20
Assets $682 x 90% 613.80
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Value per share $639.00
The alternate valuation deemed appropriate by Kirby is as follows
Market $125 x 55% $ 68.75
Earnings $109 x 40% 43.60
Assets $456 x 5% 22.80
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Value per share $135.15
--- or ---
Earnings $109 x 95% $103.55
Assets $456 x 5% 22.80
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Value per share $126.35
A glance at these computations makes it clear that the area of greatest disagreement lies in the value attributed to Kirby's assets and, even more so, in the weight to be assigned to this asset value element in order to arrive at a fair value for a share of Kirby stock as of the date of the merger. This factor as well as the wide disparity which is conceded by all to exist between asset value and earnings value, warrants a brief explanatory background.
As noted previously, Kirby is, and always has been, in the lumber business. It owns more than 557,000 acres of forest land located in eastern Texas and southwestern Louisiana (a total area almost one-half of the size of the State of Delaware.) As of the time of the merger Kirby owned and operated both a sawmill and a plywood plant in Silsbee, Texas. Also at the time of the merger it had under construction a new plywood plant at Bon Weir, Texas, and a particleboard plant in Silsbee, both scheduled to be completed and operational by late 1974 or early 1975. It also operated a small wood manufacturing facility in Cleveland, Texas.
Pursuant to its forestry plan in operation at the time of the merger, Kirby was harvesting its timber resources on a "sustained yield basis." This means that it harvests and processes its trees at approximately the same rate at which its timber base grows, thus maintaining a constant source of timber reserves. Historically its earnings have come from the sale of the products yielded from its timber by its manufacturing operations. For most of its history, Kirby manufactured dimension lumber and railroad ties. Starting several years before the merger, however, Kirby's management took a more aggressive view toward the use of its resource base. Stated simply, it foresaw larger profits from increased emphasis on plywood production as well as from its own processing of residuary materials which it had formerly disposed of through others. Thus the decision to construct the particleboard plant and the additional plywood plant.
It is the status brought about by this method of operation by Kirby which produces the widely divergent views of the parties as to the intrinsic value of the Kirby stock. The stockholders point to the vast natural resource assets of Kirby and take the position that it is there that the true value of the stock is to be found. Kirby contends, however, that this asset value comes into play only in the event of a liquidation or sale of assets, neither of which is contemplated as evidenced by the prevailing diversification policy of the parent, Santa Fe, and by the construction of the new manufacturing facilities. Accordingly, Kirby contends that the value of its shares at a given time derives from the success of its manufacturing operations for which the timber acreage provides only a sustained-yield base. Thus, Kirby would have earnings control the valuation of its stock while the stockholders, with equal vigor, would have the Court look almost solely to the value of the assets.
With this underlying major point of dispute in mind, I turn to the issues raised by this exceptions proceeding. While they appear to be numerous, I feel that they can be reduced to five basic areas of contention. From the standpoint of the stockholders, they contend that the Appraiser erred by refusing to value the Kirby stock on the basis of the amount that all Kirby shareholders, including Santa Fe's interests, would have received in a merger negotiated at arms length with a third party. In addition, they contend that the Appraiser erred in refusing to give consideration to the asset appraisal performed by W. D. Davis at the request of Santa Fe and in accepting, instead, with minor adjustment, the asset appraisal of R. L. Nichols made at the request of Kirby after the merger expressly for use in this appraisal proceeding. As a corollary to this argument, the stockholders argue that Kirby is estopped from attacking the Davis appraisal in this proceeding. Finally, both parties dispute the earnings value reached by the Appraiser as well as his decision to weight asset value at 40 per cent and earnings value at 60 per cent. I deal with these issues in the order set forth.
On this point the stockholders charge that the Appraiser closed his eyes to the realities of the situation, namely, that Kirby is a natural resource company. They concede that in valuing an ordinary manufacturing company, current and prospective earnings are of significant interest because essentially this is the only way such a corporation can generate a return on investment. They contend, however, that natural resource companies are not bought and sold on the basis of their earnings records. Rather, they feel that the controlling factor in the...
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