Ex parte Baron Services, Inc.

• Citation: 874 So.2d 545
• Parties: Ex parte BARON SERVICES, INC. (In re James Offenbecher v. Baron Services, Inc.).
• Decision Date: 04 April 2003
• Court: Supreme Court of Alabama

874 So.2d 545

Ex parte BARON SERVICES, INC.

(In re James Offenbecher v. Baron Services, Inc.).

1011635.

Supreme Court of Alabama.

April 4, 2003.

Rehearing Denied September 19, 2003.

Frank McRight and J. Clark Pendergrass of Lanier Ford Shaver & Payne, P.C., Huntsville, for petitioner.

S. Mitchell Howie, Huntsville, for respondent.

SEE, Justice.

Baron Services, Inc., an Alabama corporation ("Baron Services"), petitioned this Court for a writ of certiorari to review whether the Court of Civil Appeals erred in reversing the trial court's judgment with respect to the fair value of Baron Services stock held by James Offenbecher. See Offenbecher v. Baron Services, Inc., 874 So.2d 532 (Ala.Civ.App.2002)

. This Court granted certiorari review on September 13, 2002. For the reasons discussed below, we affirm the judgment of the Court of Civil Appeals.

I.

Baron Services, located in Huntsville, develops weather-radar software that assists local television stations in monitoring storms and in predicting the timing, severity, and location of storms. Robert Baron founded Baron Services in 1990 and retains a controlling interest in the stock of the company. He currently serves as the company's president and chief executive officer.

On March 31, 1998, the board of directors of Baron Services approved a plan of merger pursuant to which Baron Services was to merge into Baron Services, Inc., a Delaware corporation ("Baron-Delaware"). The proposed merger was structured as a stock-for-stock exchange, that is, a shareholder in Baron Services would receive one share of Baron-Delaware stock for each share of Baron Services stock he or she owned. The merger plan also contained a cash-out provision applicable to any shareholder who owned fewer than 150 shares of Baron Services stock; it provided that any such shareholder would receive the cash value of his or her shares instead of stock in the surviving corporation. Offenbecher owned 130 shares of Baron Services stock, which he received in exchange for services he had provided to the company; therefore, under the terms of the proposed merger, Offenbecher's shares were to be cashed out.

In conjunction with the merger, Baron Services engaged Gary Saliba of Saliba Financial Economics Group, Inc., to value the company's stock.¹ Saliba estimated that, as of December 31, 1997, "the fair value of a shareholder's interest in Baron Services, Inc.," was $1,124.94 per share. Saliba estimated the "marketable value of the Company's equity" at $562.47 per share, after applying a 50% marketability discount. Saliba subsequently adjusted this estimate to $547.77 per share upon receiving a lower sales forecast from Baron Services.

To arrive at those figures, Saliba calculated the weighted-average value of Baron Services' equity under two recognized methods of valuation—discounting future earnings and capitalizing actual earnings. Discounting and capitalizing earnings are direct-valuation approaches, that is, they rely on data specific to the subject company. Discounting is a valuation approach in which a discount rate is applied against a stream of projected future earnings. The discount rate represents the rate of return an investor in the company would expect to receive over a long period. Capitalizing earnings involves applying a capitalization rate, which is derived from the discount rate, to past years' earnings.²

A majority of the shareholders at a shareholders' meeting on April 17, 1998, adopted the plan of merger approved by the board of directors on March 31, 1998. Exercising his rights under § 10-2B-13.02(a), Ala.Code 1975, Offenbecher dissented from the plan of merger and demanded payment for his shares, specifically rejecting the price at which his shares were to be purchased pursuant to the plan of merger. On August 11, 1998, Baron Services petitioned the trial court, pursuant to § 10-2B-13.30, Ala.Code 1975, to appraise the fair value of its stock.³

The action proceeded to trial on February 7, 2000. The proceedings included oral testimony from financial experts for each of the parties. On April 13, 2000, the trial court entered an order, finding that the amount Baron Services had offered Offenbecher for his shares represented the fair value of those shares. That order read, in part:

"The Court finds from the evidence that Mr. Saliba's appraisal, more fairly and reasonably than the appraisal performed for Mr. Offenbecher by Mr. `Butch' Williams [Offenbecher's financial expert], reflects the fair value of Mr. Offenbecher's stock....

"The Court also finds as a matter of financial analysis that Mr. Saliba's decision to apply a marketability discount `at the corporate level' was reasonable and necessary to the determination of the `fair value' of Baron Services' stock. The Court also concludes that a marketability discount was appropriate as a matter of law."

On May 15, 2000, Offenbecher moved the trial court to alter, amend, or vacate the judgment.⁴ The trial court denied the motion on July 17, 2000, after hearing oral arguments. Offenbecher filed a notice of appeal in the Court of Civil Appeals on August 25, 2000. On May 18, 2001, the Court of Civil Appeals affirmed the judgment of the trial court. On June 1, 2001, Offenbecher applied for a rehearing, which the Court of Civil Appeals granted. On May 10, 2002, the Court of Civil Appeals withdrew its May 18, 2001, opinion and issued another opinion, affirming the judgment of the trial court in part and reversing the trial court's judgment insofar as it applied a 50% marketability discount when valuing Baron Services stock. Offenbecher, 874 So.2d at 539.

II.

The sole issue we address on appeal is the meaning of "fair value" under § 10-2B-13.01, Ala.Code 1975, and whether the meaning of that term provides for the application of a marketability discount in the context of a judicial appraisal of a dissenting shareholder's shares. This question is one of first impression in this Court; it is for this reason that we granted Baron Services' petition for certiorari review. See Rule 39(a)(1)(C), Ala. R.App. P.

Standard of Review

The trial court entered its judgment in this case after hearing oral testimony from the parties regarding the fair value of Baron Services stock. Therefore, the ore tenus rule applies to our review of the trial court's findings of fact. "Under the ore tenus rule, a trial court's findings of fact are presumed correct and its judgment will be reversed only if plainly or palpably wrong or against the preponderance of the evidence." Ex parte Cater, 772 So.2d 1117, 1119 (Ala.2000). The appraisal of the fair value of a dissenting shareholder's stock is a question of fact. Huntsville Indus. Assocs., Inc. v. Cummings, 292 Ala. 391, 398, 295 So.2d 251, 256 (1974).

The trial court's interpretation of § 10-2B-13.01, Ala.Code 1975, involves a question of law; it is, therefore, not subject to the ore tenus standard of review. "[T]he ore tenus rule does not extend to cloak a trial judge's conclusions of law ... with a presumption of correctness." Eubanks v. Hale, 752 So.2d 1113, 1144-45 (Ala.1999). Therefore, we review de novo, without any presumption of correctness, the trial court's conclusions as to the permissibility of applying a marketability discount to appraise "fair value" under § 10-2B-13.01, Ala.Code 1975.

The Meaning of Fair Value

"Fair value," with respect to a dissenter's shares, is defined at § 10-2B-13.01(4), Ala.Code 1975, as follows:

"`Fair Value,' with respect to a dissenter's shares, means the value of the shares 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 exclusion would be inequitable."

The statute is silent on the application of a marketability discount.⁵ Therefore, we are forced to look outside the language of the statute to determine what the Legislature intended.

Baron Services urges this Court to adopt a definition of fair value that would permit the application of marketability discounts in the case of shares of a closely held corporation. A marketability discount adjusts for a lack of liquidity in one's shares on the theory that there is a limited supply of potential buyers for stock in a closely held corporation. Thus, the interpretation of fair value advanced by Baron Services takes into account the limited market available for sale of the shares.

Under its interpretation of fair value, Baron Services essentially equates fair value with fair market value.

"Under a fair market value standard a marketability discount should be applied because the court is, by definition, determining the price at which a specific allotment of shares would change hands between a willing buyer and a willing seller."

Pueblo Bancorporation v. Lindoe, Inc., 63 P.3d 353, 361 (Colo.2003).

There is, however, a fundamental difference between fair value and fair market value when those terms are used in the appraisal context:

"`Fair value' is not the same as, or short-hand for, `fair market value.' `Fair value' carries with it the statutory purpose that shareholders be fairly compensated, which may or may not equate with the market's judgment about the stock's value. This is particularly appropriate in the close corporation setting where there is no ready market for the shares and consequently no fair market value.

"... When appraising shares of a close corporation, fair value cannot be fairly equated with the company's fair market value. Close corporations by their nature have less value to outsiders, but at the same time their value may be even greater to other shareholders who want to keep the business in the form of a close corporation. [Marketability] [d]iscounts would call for speculation by a court as to whether a market exists by requiring the judge to determine a value, deduct a variable percentage, decide how unmarketable a stock is, and so forth....

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