Hogle v. Zinetics Medical, Inc.

• Decision Date: 13 December 2002
• Docket Number: No. 20000470.,20000470.
• Parties: Patrick HOGLE; Salt Lake, Garfield & Western Railway Company, a Utah corporation; Ronald A. Johnson; J.W. Gallivan Children's Trust; H. Mack Brown; Jeff Owen; and Claire A. Singleton, Plaintiffs and Appellants, v. ZINETICS MEDICAL, INC., a Utah corporation; and Medtronic, Inc., a Minnesota corporation, Defendants and Appellees. Zinetics Medical, Inc., Plaintiff and Appellee, v. Ayyoob Abbaszadeh, Kenneth Anderson, Richard Belliston, et al., Defendants and Appellants.
• Court: Utah Supreme Court

63 P.3d 80

2002 UT 121

Patrick HOGLE; Salt Lake, Garfield & Western Railway Company, a Utah corporation; Ronald A. Johnson; J.W. Gallivan Children's Trust; H. Mack Brown; Jeff Owen; and Claire A. Singleton, Plaintiffs and Appellants, v. ZINETICS MEDICAL, INC., a Utah corporation; and Medtronic, Inc., a Minnesota corporation, Defendants and Appellees.

Zinetics Medical, Inc., Plaintiff and Appellee, v. Ayyoob Abbaszadeh, Kenneth Anderson, Richard Belliston, et al., Defendants and Appellants.

No. 20000470.

Supreme Court of Utah.

December 13, 2002.

Robert A. Peterson, Rebecca S. Parr, Karen L. Martinez, Salt Lake City, for plaintiffs and Ayyoob Abbaszadeh.

William Z. Pentelovitch, Alain M. Baudry, Minneapolis, MN, and Brent E. Johnson, James L. Barnett, Salt Lake City, for Zinetics and Medtronic.

HOWE, Justice:

INTRODUCTION

¶ 1 Minority shareholders of Zinetics Medical, Inc., dissenting from the forced purchase of their shares by the parent corporation, Medtronic, Inc., appeal from the district court's valuation of minority shares at less than 4.528 cents per share under Utah Code Ann. section 16-10a-1302. They contend that the court failed to consider all relevant factors and failed to explain the basis for its valuation.

BACKGROUND

¶ 2 Zinetics Medical, Inc., was first incorporated under another name in 1983. Despite several years of financial struggle, the company developed and brought to market a specialized catheter designed for use in diagnostic equipment manufactured by others. In 1991, Zinetics' directors approved the sale of 81% of the company's common stock shares to Synectics, a Swedish company, for $255,000. With access to Synectics' worldwide distribution network and customer base, Zinetics began to prosper. Beginning in 1992, the company experienced steady revenue and profitability increases.

¶ 3 In 1996, Medtronic, Inc., acquired 100% of Synectics. Almost immediately disagreements arose between Medtronic and the Zinetics minority shareholders (the Minority) over the management and future direction of Zinetics. The Minority desired to expand the product line and develop Zinetics as a stand-alone company with an independent market. It was their perception that Medtronic preferred to keep Zinetics as a "captive" original equipment manufacturer bolstering Medtronic's performance by supplying low cost catheters for Medtronic affiliates to incorporate into their products and then sell at a substantial markup.

¶ 4 Medtronic commenced attempts to buy out the Minority, first offering 1.75 cents per share. The Minority offered to buy out Medtronic's shares of Zinetics at the same price. Medtronic then offered 3.6 cents per share. The Minority refused this offer, believing that it did not reflect the true value of the company, and again offered to buy Medtronic's shares at the same price. In October of 1997, the Minority offered to purchase 80% of Medtronic's 81% interest, or approximately 60% of Zinetics stock, for $3,875,000 paid over time. This offer included an exclusive supply and distribution agreement, providing Medtronic with continued access to Zinetics products.

¶ 5 Medtronic representatives scheduled a meeting with the Minority's representatives for January 23, 1998, ostensibly to finalize the terms of the stock purchase. However, on January 20, 1998, Medtronic presented an Agreement and Plan of Reorganization under which Medtronic would pay the Minority 4.528 cents per share and become 100% owner of Zinetics. The Minority made a final attempt to buy out Medtronic at ten cents per share in an offer including a non-exclusive supply and distribution agreement. Medtronic representatives rejected the offer purportedly because it lacked an exclusive supply agreement. Further negotiations proved unavailing, and Medtronic proceeded with a forced merger.

¶ 6 The Minority voted against the merger and exercised their dissenters' rights under section 16-10a-1302 of the Revised Business Corporations Act, Utah Code Ann. §§ 16-10a-101 to -1705 (Supp.1995). Medtronic filed a petition for a determination of fair value under section 16-10a-1330. Both parties provided expert valuations. Neither party submitted evidence of asset value, but both submitted calculations using the market and the investment valuation methods. After weighting and averaging the results of the two methods, Medtronic's expert, Merrill R. Norman, fixed a value of 1.97 cents per share. The Minority's expert, Robert F. Reilly, determined the Zinetics stock to be worth 18 cents per share. ¶ 7 The Minority submitted evidence of Zinetics' performance and argued that rather than continuing Zinetics' current growth trends into the future, Norman's projections inexplicably broke with and undercut the trends. Notably, although Zinetics' total revenues had increased since 1993 at a compounded annual growth rate of 19.3%, Norman set the 1998 adjusted earnings that served as a basis for his forward projections at a figure 15% lower than the 1997 adjusted earnings. Furthermore, Zinetics' performance during the period following the merger significantly outstripped Norman's projections and exceeded even Reilly's more optimistic figures.

¶ 8 Reilly relied on two sets of projections supplied by Zinetics' president, Steve Davis. Reilly also prepared a third set of projections based on Davis' deposition and on information from the previous projections. Respectively, these projections predicted total revenues of $4,153,000, $3,918,000, and $3,190,000 for the 1998 fiscal year.

¶ 9 The district court issued a sixteen-page memorandum decision discussing Zinetics' structure and operations and the valuation methods used. After rejecting both parties' bases for determining fair value of the shares and adopting the investment valuation technique of Medtronic's expert, the district court concluded that "the fair value of Zinetics' common stock is less than $ .04528 per share and that, accordingly, respondents have received fair value for their stock." The Minority appeals and urges us to reject the district court's valuation and remand for a new value determination by a "special master."

ANALYSIS

¶ 10 In this appeal, we must determine whether the district court properly determined fair value as defined in Utah Code Ann. section 16-10a-1301(4) and interpreted in Oakridge Energy, Inc. v. Clifton, 937 P.2d 130 (Utah 1997). "[W]hile the ultimate determination of fair value is a question of fact, the determination of whether a given fact or circumstance is relevant to fair value under [state law] is a question of law which we review de novo." Swope v. Siegel-Robert, Inc., 243 F.3d 486, 491 (8th Cir.),

cert. denied, 534 U.S. 887, 122 S.Ct. 198, 151 L.Ed.2d 139 (2001).

I. DID THE DISTRICT COURT PROPERLY DETERMINE THE FAIR VALUE OF THE MINORITY'S SHARES UNDER UTAH'S DISSENTERS' RIGHTS STATUTE?

¶ 11 The Utah dissenters' rights statute provides in relevant part that "the corporation shall pay the amount the corporation estimates to be the fair value of the dissenter's shares, plus interest to each dissenter" who meets the applicable requirements. Utah Code Ann. § 16-10a-1325(1) (1995). If the dissenter disagrees with the corporation's estimate of value, the corporation is obligated to petition the court for valuation under section 16-10a-1330. The dissenter is then entitled to judgment for any amount "by which the court finds that the fair value of his shares, plus interest, exceeds the amount paid by the corporation." Id. § 16-10a-1330(5)(a). Under the definition provided in section 16-10a-1301(4), "`[f]air 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."

¶ 12 Since 1991, Zinetics has been first a subsidiary of Synectics and later part of the Synectics package acquired by Medtronic. The parties, however, provided the court considerable discussion and speculation on the value, future, and prospects of Zinetics as a stand-alone company. The district court found "that Zinetics' intrinsic value would most likely be maximized as an affiliate of Synectics." The court relied for this finding on the undisputed fact that Zinetics first became profitable after affiliating with Synectics and obtaining the benefit of the parent company's "reliable market and effective distribution network."

¶ 13 The object of dissenters' rights legislation is to provide a dissenting minority with the fair value of the shares that they possess. See Utah Code Ann. § 16-10a-1301(4) (1995); Hunter v. Mitek Indus., Inc., 721 F.Supp. 1102, 1106-07 (E.D.Mo.1989) ("[T]he purpose of the appraisal statute is to award the dissenter the value of what he owned."). In this case, the Minority actually owned shares in a subsidiary company, not in a stand-alone company. Therefore, the district court's finding is a correct application of the statute.

¶ 14 This determination relates closely to the parties' dispute over the relevance of the Minority's offer to buy out Medtronic at ten cents per share. The Minority contends that the district court erred in giving no weight to that attempt. Medtronic counters that ten cents per share was a "sham offer" unsupported by evidence of feasible financing. The district court's memorandum decision makes no mention of the issue. However, in all of the parties' discussions, the fundamental premise of the purchase offer was that the erstwhile Minority would use its ownership control to recast Zinetics as a stand-alone catheter manufacturer. Therefore, what the Minority had to sell-minority shares in a subsidiary—and what it was attempting to buy-majority shares in a stand-alone company—were two significantly different items. Even investment bankers' opinions on the feasibility of obtaining financing for the buyout would relate not to the value of the Minority's...