Columbia Management Co. v. Wyss

• Decision Date: 17 February 1989
• Citation: 94 Or.App. 195,765 P.2d 207
• Parties: COLUMBIA MANAGEMENT CO., Respondent-Cross-Appellant, v. Loren L. WYSS, Appellant-Cross-Respondent. A8502-01236; CA A44975.
• Court: Oregon Court of Appeals

Page 207

765 P.2d 207

94 Or.App. 195

COLUMBIA MANAGEMENT CO., Respondent-Cross-Appellant, v. Loren L. WYSS, Appellant-Cross-Respondent.

A8502-01236; CA A44975.

Court of Appeals of Oregon.

Argued and Submitted Sept. 19, 1988.

Decided Nov. 30, 1988.

Reconsideration Denied Jan. 13, and Feb. 17, 1989.

James H. Clarke, Portland, argued the cause for appellant-cross-respondent. With him on the briefs was Spears, Lubersky, Campbell, Bledsoe, Anderson & Young, Portland.

Barnes H. Ellis, Portland, argued the cause for respondent-cross-appellant. With him on the brief were Charles F. Hinkle, Christine Kitchel and Stoel, Rives, Boley, Jones & Grey, Portland.

Before WARDEN, P.J., and WARREN and ROSSMAN, JJ.

WARDEN, Presiding Judge.

This is an action under former ORS 57.865 to ORS 57.890 ¹ to determine the value of the shares of petitioner's stock that Loren Wyss (Wyss), a dissenting shareholder, holds in Columbia Management Company (Columbia). The trial court accepted the value proposed by a panel of appraisers. In arriving at that value, the appraisers first determined Columbia's enterprise value and the proportion of that enterprise value that Wyss' shares represented. They then applied successive minority interest and marketability discounts in order to determine the fair market value of Wyss' shares. The result of the discounts was that the final value for Wyss' shares was about 44 percent of their proportionate part of Columbia's enterprise value. On appeal, Wyss challenges both discounts. The facts are not in dispute; the only issue is one of law. We hold that the trial court correctly applied a marketability discount but that it should not have also applied a minority interest discount. We therefore modify the judgment. ²

Columbia is a successful financial services corporation. Wyss was one of its founders and was an employe until the end of 1981. ³ During his employment, he acquired 18,000 shares of Columbia's stock; after his termination, he was the only non-employe shareholder. His holdings represented a little over 14 percent of the total shares. By late fall 1984, they were the only shares not covered by a buy-sell agreement among the shareholders.

On November 1, 1984, Columbia notified its shareholders of a special meeting, to be held November 14, to consider authorizing 900,000 additional shares, 100,000 of which were to have such rights and preferences as Columbia's board might designate at the time of issuance. The notice informed the shareholders of their statutory dissenter's rights and that, if they intended to exercise those rights, they had to do so before the meeting. ORS 57.875. Wyss complied with the various statutory requirements for dissenting and for receiving the fair value of his shares. Columbia valued his holdings at $60 per share, which was slightly above their book value, and tendered that amount, a total of slightly over $1 million. Wyss replied, demanding $10.5 million. See ORS 57.880(3), (4).

The parties were unable to resolve their disagreement, and Columbia then filed this action, asking the court to determine the fair value of the shares. ORS 57.885(1). The court appointed appraisers to recommend a decision on the question of fair value. ORS 57.865(2); ORS 57.885(4). The appraisers first decided that "fair value" meant "fair market value." After taking evidence from both sides, they concluded that the best method of finding fair market value was to determine the value of Wyss' proportionate share of the total business and then to adjust that value to reflect Wyss' minority position and the lack of a ready market for shares that were not actively traded. They first determined that Columbia's enterprise value was $50 million and that Wyss' proportionate share of that value was $7.185 million. They then applied successive discounts of 33.3 percent each, the first for Wyss' minority position and the second for the difficulty of marketing his shares. They reported that the fair value of Wyss' shares, after the discounts, was $3.196 million. The issue on appeal is the appropriateness of the discounts.

A shareholder who has the right to dissent from a corporate action and obtain payment for the shareholder's shares under ORS 57.870 ⁴ is entitled to receive the "fair value" of the shares. ORS 57.875(2); ORS 57.885(1). ORS 57.865(2) provides:

" 'Fair value' of shares means their value immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless the exclusion would be inequitable."

That definition "is hardly self-executing in its clarity * * *." O'Connor Appeal, 452 Pa. 287, 291, 304 A.2d 694 (1973). It simply defines "fair value" as "value" at a certain time and excludes factors that neither party to this case seeks to include. The official comments to § 13.01 (formerly § 81(a)) of the Model Business Corporation Act, the source of this provision, state that the definition

"leaves to the parties (and ultimately to the courts) the details by which 'fair value' is to be determined within the broad outlines of the definition. This definition thus leaves untouched the accumulated case law about market value, value based on prior sales, capitalized earnings value, and asset value."

The accumulated case law to which the commentary refers is somewhat more helpful than is the bare statutory definition. A number of dissenters' rights statutes use "fair value" as the standard for determining what the corporation must pay for the dissenter's shares. Cases under those statutes generally hold that "fair market value," in the sense of what a willing buyer would pay a willing seller, is only one of the criteria to consider. They generally emphasize three approaches to determining fair value: Market value, net asset value, and earnings or investment value. ⁵ See, e.g., Ford v. Courier-Journal Job Printing Co., 639 S.W.2d 553, 555 (Ky.App.1982); O'Connor Appeal, supra; but see Perlman v. Permonite Mfg. Co., 568 F.Supp. 222 (N.D.Ind.1983), aff'd 734 F.2d 1283 (7th Cir. 1984). ⁶ Determining a fair price requires considering all three approaches; the relative weight given each will depend on the circumstances of the case. See Atlantic States Construction v. Beavers, 169 Ga.App. 584, 586, 314 S.E.2d 245 (1984); Richardson v. Palmer Broadcasting Co., 353 N.W.2d 374, 376-377 (Iowa 1984); Woodward v. Quigley, 257 Iowa 1077, 1082, 133 N.W.2d 38, 136 N.W.2d 280 (1965); Moore v. New Ammest, Inc., 6 Kan.App.2d 461, 630 P.2d 167 (1981); Sarrouf v. New England Patriots Football Club, Inc., 397 Mass. 542, 548-549, 492 N.E.2d 1122 (1986); Dreiseszun v. FLM Industries, Inc., 577 S.W.2d 902, 906 (Mo.App.1979); see also 12B Fletcher, Cyclopedia Corporations, § 5906.12 (rev. ed. 1984); Annot., 48 A.L.R.3d 430, 435-437 (1973).

Several cases on corporate valuation provide examples of how courts apply the various approaches. In Sarrouf v. New England Patriots Football Club, Inc., supra, one corporation was merged into another. The original corporation had 100,000 shares of voting stock, all owned by one person, and 139,800 shares of non-voting stock, owned in part by members of the plaintiff class. Other than voting, the rights of the shares were identical. The court noted that market value cannot be a reliable indicator of actual value when there is no established market and that reconstructing a hypothetical market value may be no more than evaluating the other factors. Instead of trying to do so, the court determined the value of the plaintiffs' shares by dividing the number of shares into the value of the enterprise as a whole. It pointed out that, when a partial ownership is taken against the owner's will, and the alternative of pro rata valuation of the entire business is readily available, the owner should not have to abandon the stake simply because the market cannot accurately reflect its value.

In Ford v. Courier-Journal Job Printing Co., supra, the company was closely held and there was no active market; the few transactions were special cases and did not establish a market price. The earnings approach produced a value of $85 per share, while the net asset approach resulted in a value of $165 per share. The appraisers and the trial court accepted the net asset approach, but applied a 25 percent marketability discount, resulting in a fair value of $124. The appellate court affirmed, noting that the use of a marketability discount simply indicated that the trial court had given some weight to market value in determining fair value. The court emphasized that the discount was not based on the dissenters' minority position.

In Dreiseszun v. FLM Industries, Inc., supra, the court also rejected market value as the sole measure and insisted on a more comprehensive definition of fair value. The corporation had sold essentially all of its assets. It proposed to use part of the proceeds to buy out the minority at $23 per share and then to operate the business as an investment holding company for the benefit of the majority. The trial court held that $23 was the market price, because other minority shareholders had accepted it, and it therefore set the fair value of the dissenters' shares at $23. The appellate court disagreed. It pointed out that the dissenter appraisal statutes were designed to replace the requirement of unanimous shareholder consent to a transfer of substantially all of the corporate assets, that the right of appraisal is a substitute for the protection that the requirement of unanimity had previously provided the minority, that the minority should not be penalized by a discount for taking advantage of that protection and that the price of the sale of the assets, to which no one objected, established the fair value of the entire corporation. The court held that the fair value of the dissenters' shares was a proportionate share of that price. 577 S.W.2d at 907-908.

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