Hernando Bank v. Huff, DC83-49-NB-O.

• Decision Date: 13 May 1985
• Docket Number: No. DC83-49-NB-O.,DC83-49-NB-O.
• Citation: 609 F. Supp. 1124
• Parties: The HERNANDO BANK and Gateway Capital Corporation, Plaintiffs, v. Sharon Smith HUFF, William B. Kountz, Jr., Robert A. Kountz, Diane Smith McDowell, and Mrs. Willie W. Kountz, Defendants.
• Court: U.S. District Court — Northern District of Mississippi

609 F. Supp. 1124

The HERNANDO BANK and Gateway Capital Corporation, Plaintiffs, v. Sharon Smith HUFF, William B. Kountz, Jr., Robert A. Kountz, Diane Smith McDowell, and Mrs. Willie W. Kountz, Defendants.

No. DC83-49-NB-O.

United States District Court, N.D. Mississippi, Delta Division.

May 13, 1985.

Charles M. Merkel, Clarksdale, Miss., William W. Ballard, Hernando, Miss., for plaintiffs.

John W. Dulaney, Tunica, Miss., for defendants.

MEMORANDUM OPINION

BIGGERS, District Judge.

This diversity case involves valuation of the stock of several shareholders who dissented to the change of corporate form by plaintiff Hernando Bank, a banking corporation, to a banking corporation owned by a one-bank holding company, plaintiff Gateway Capitol Corporation. In a vote taken on September 9, 1982, a sufficient number of shareholders in the Hernando Bank approved the change in corporate form; thus, the Hernando Bank subsequently became a wholly-owned subsidiary of Gateway Capital Corporation. The defendants herein dissented to the proposed merger and perfected their rights pursuant to Miss.Code Ann. § 79-3-161 (1972) to demand that their stock be purchased by the plaintiff Hernando Bank.¹

A. Statutory Construction

In accordance with the Mississippi statute, the Hernando Bank obtained an appraisal of the stock from Morgan-Keegan of Memphis, Tennessee. Morgan-Keegan determined that the stock had a fair market value of $78.50 per share, to which the Hernando Bank added accrued dividends and offered the defendants the sum of $80.50 per share.² This offer was rejected by the defendants; thus, the plaintiffs seek a court determination of the proper value per share of stock.

Cal-Maine Foods, Inc. v. Duvic, 264 So.2d 383 (Miss.1972) is the only reported decision involving the statute in issue. In that case, the Mississippi Supreme Court found no reversible error in the valuation placed on dissenters' stock by a chancellor, stating that such determination under Mississippi law is a purely factual issue to be resolved by the trier of fact. Id. at 384. Inasmuch as the absence of case law requires this court to make an "Erie guess" regarding construction of the statute, see Bernhardt v. Polygraphic Co. of America, 350 U.S. 198, 204-05, 76 S.Ct. 273, 277, 100 L.Ed. 199, 206 (1956), the factors viewed by the chancellor provide this court with some guidance. These factors include

the liquidating value, the net asset value, the market value, the asset value, the dividends, the earnings prospects, the nature of the enterprise, the general market conditions, the availability of financing, management's performance, prospects for dividends, past and future earnings, general economic conditions under which the company was operated, particular industry involved, the trends within that industry, the long range obligations of the company, and the long range prospects of the company, and including the offers of the defendant to the complainant ... and the investing experience of the complainant and of the defendant....

Duvic v. Cal-Maine Foods, Inc., No. 81,116, slip op. at 9 (Miss.Ch., 1st Jud.Dist. Hinds Cty. July 20, 1971).

The defendants argue that the statute excludes consideration of any purchase offers, since fair value must be determined on the date prior to approval of the proposed corporate action and without reference to appreciation or depreciation in anticipation of such action. This provision indicates to the court that the corporation should be viewed as a going concern, rather than a liquidated entity.³ However, the statutory prohibition against the consideration of any appreciation or depreciation in anticipation of a corporate merger in no way excludes consideration of purchase offers made for this or comparable corporations. In fact, since the going concern value of a company is generally defined as "its worth as an operating business to another firm or individual," see Western & Brigham, Essentials of Managerial Finance 443 (6th ed. 1982), such offers have particular relevance. In the case of an offer for a comparable company, the relevance of a purchase offer is not diminished due to the consummation of the sale.

B. Minority Discount

Furthermore, the defendants argue at length that their stock shares should be valued as a pro rata share of the corporation, and that a "minority discount" due to the lack of corporate control in such shares is improper. The defendants strenuously contend that a minority shareholder should not be "punished" for his lack of a controlling interest by discounting his stock, especially since the corporate change in form is involuntary with respect to the dissenter. See Dreiseszun v. FLM Industries, Inc., 577 S.W.2d 902, 906 (Mo.App.1979) (minority discount improper); Woodward v. Quigley, 257 Iowa 1077, 133 N.W.2d 38, 41, modified on rehearing, 257 Iowa 1077, 136 N.W.2d 280 (1965) (same).

Despite the superficial appeal of the defendants' argument, the court is unconvinced that a minority share of stock should be valued as though it were a controlling share of a corporation. Accordingly, the court concludes that in the present case a minority discount is proper in determining the fair value of the stock of the dissenters.

C. Valuation

Courts universally view three elements in determining the fair value of stock — market value, asset value, and investment (or earnings) value. Valuation of Dissenters' Stock Under Appraisal Statutes, 79 Harv.L.Rev. 1453, 1457 (1966). However,

all three elements do not have to influence the result in every valuation proceeding. It suffices if they are all considered. Compelling the consideration of all of them, including those which may turn out to be unreliable in a particular case, has the salutary effect of assuring more complete justification by the appraiser of the conclusion he reaches. It also provides a more concrete basis for court review.

Endicott Johnson Corp. v. Bade, 37 N.Y.2d 585, 376 N.Y.S.2d 103, 106, 338 N.E.2d 614, 616 (N.Y.1975). This court approves of the approach adopted in Endicott and other cases, and therefore shall consider all three methods.

1. Market Value Approach

Market value, or fair market value, is "the amount that a purchaser who is willing, but not required to buy, would pay, and that a seller who is willing but not required to sell, would accept"; Bear Creek Water Association v. Town of Madison, 416 So.2d 399, 402 (Miss.1982); furthermore, it is necessary that "both the purchaser and the seller be fully informed of all the circumstances involving the value and use of the property." Id. at 403. In determining fair market value of stock, the price at which recent sales were made obviously is relevant. Although the market for stock in the Hernando Bank was relatively thin and primarily consisted of insider transactions in non-controlling stock interests, the value at which the stock changed hands is nonetheless significant.

Evidence presented at trial showed that the Hernando Bank issued new shares of stock in 1974 and 1977 at $80.00 and $85.00 per share, respectively. Despite some evidence to the contrary, the court finds that the Hernando Bank experienced healthy growth between such dates and the time of the merger. In making this determination, the court is persuaded by many items of evidence presented at trial. For example, between 1974 when the officers and directors valued new Hernando Bank stock at $80.00 per share, and 1982 when the bank merged, deposits had a 155% increase from $19,100,000.00 to $48,700,000.00. Furthermore, between 1977 and September 8, 1982, bank assets increased by 70%, from $31,300,000.00 to $53,200,000.00. In 1977, earnings before securities transactions were 246,000.00; however, 1981 brought a 96% increase to $482,000.00. Furthermore, loans increased by 70% from $28,700,000.00 in 1977 to $48,700,000.00 in 1982; however, the loan loss ratio was one of the lowest in the state. Bank capital increased from $2,300,000.00 in 1977 to $3,400,000.00 in 1982, and investments practically doubled from $10,300,000.00 to $19,000,000.00 during the same period. The substantial growth is due to both population increase in DeSoto County and the good management of the Hernando Bank.

In view of the substantial growth of the Hernando Bank, this court has difficulty in understanding how the market value of the stock could have decreased to $78.50 per share, as determined by the Morgan-Keegan appraisal. It is even more difficult for this court to accept the plaintiffs' current contention that Morgan-Keegan erroneously adjusted the value of the stock upward to compensate for a market depression, and that the proper valuation is only $45.00 per share. The court instead is impressed by the fact that there were a number of sales in the $95.00 to $100.00 range in recent years prior to the evaluation date.⁴ Furthermore, the court notes that the officers and directors of the Hernando Bank set $95.00 as the price at which the bank's Employee Stock Option Plan (ESOP) would purchase stock shares. In view of this evidence, the court determines that $95.00 per share is the proper market value.

2. Asset Value Approach

The asset value approach, which involves valuation of the total corporate assets, is most useful in cases wherein the corporation is to be liquidated and the assets sold, since "minority stockholders typically have invested for dividend income or stock appreciation and rarely expect to share in the physical assets." 79 Harv.L.Rev. at 1460. See also In Re Valuation of Common Stock of Libby, McNeill & Libby, 406 A.2d 54, 66 (Me.1979) (net asset value generally not heavily weighted in stock valuation unless such valuation made for liquidation purposes).

In the present case, the sole evidence submitted regarding the value of the corporate assets was a fire insurance policy on some of the bank's assets. Inasmuch as this policy at best is probative only as to the value of the physical...