IN RE 75,629 SHARES OF COMMON STOCK

• Decision Date: 15 January 1999
• Docket Number: No. 97-175.,97-175.
• Citation: 725 A.2d 927
• Parties: In re 75,629 SHARES OF COMMON STOCK OF TRAPP FAMILY LODGE, INC.
• Court: Vermont Supreme Court

725 A.2d 927

In re 75,629 SHARES OF COMMON STOCK OF TRAPP FAMILY LODGE, INC.

No. 97-175.

Supreme Court of Vermont.

January 15, 1999.

Motion for Reargument Denied February 18, 1999.

Peter F. Langrock of Langrock Sperry & Wool, Middlebury, and Averill Laundon of Darby, Laundon, Stearns, Thorndike & Kolter, Waterbury, for Appellants.

Donald J. Rendall, Jr. of Sheehey, Brue, Gray & Furlong, P.C., Burlington, for Appellees.

Present: AMESTOY, C.J., and DOOLEY, MORSE, JOHNSON and SKOGLUND, JJ.

JOHNSON, J.

This is a dissenters' rights case in which Trapp Family Lodge, Inc., (TFL) appeals from a decision of the Lamoille County Superior Court that determined the fair value of the corporation's stock to be $63.44 per share. TFL argues that the trial court erred by (1) rejecting the testimony of its expert witness and adopting the valuation of the dissenting shareholders' expert in its entirety; (2) failing to consider the tax consequences of a hypothetical sale of corporate assets; (3) refusing to give weight to share valuations adopted for the purpose of a shareholders' agreement; and (4) applying a thirty-percent control premium. We affirm.

The facts as found by the trial court are as follows. TFL was incorporated in Vermont in 1962 as a holding company for certain assets of the von Trapp family. TFL's assets include the Trapp Family Lodge, located in Stowe, Vermont. The Trapp Family Lodge is a resort hotel complex consisting of a hotel, two residential dwellings, and a cross-country skiing complex, all located on approximately 100 acres of land. In addition to the lodge facility, TFL owns approximately 2,200 acres of additional land. At the time of the merger that spawned this dispute, in January 1995, TFL also owned a timeshare facility known as the Trapp Family Guest Houses. Timeshare unit owners had exercised an option to purchase part of this facility, and the remaining $4,517,000 was payable to TFL in June 1995. Finally, TFL owns some royalty rights from which it receives annual income. As of the date of the merger, TFL's long term debt totaled approximately $6,430,700.

In September 1994, TFL gave notice to its shareholders of a special meeting to be held to consider a proposed merger of TFL into a new corporation. Prior to the meeting, TFL received notice from the dissenting shareholders indicating their intent to vote against the merger and to demand the payment of fair value for their shares. The merger was duly approved by the shareholders on October 17, 1994 at the special meeting. Prior to December 1, 1994, the dissenting shareholders, holding 75,629 of the corporation's 198,000 outstanding shares, tendered their shares and submitted forms demanding payment for them.

On January 28, 1995, TFL notified the dissenting shareholders that the merger had been completed, and paid the dissenting shareholders $33.84 per share, which the TFL board of directors estimated to be the fair value of each share based on a valuation completed by its expert Arthur Haut. On February 24, 1995, the dissenting shareholders filed demands with TFL for additional payments for their shares, claiming each share to be worth $61.00. On March 31, 1995, TFL commenced this action under 11A V.S.A. § 13.30 to determine the fair value of its stock as of the date of the merger.

The trial court concluded that the dissenting shareholders had complied with all statutory requirements necessary to entitle them to receive fair value for their shares. The court fixed the per share value of TFL on January 28, 1995, the date of merger, at $63.44 based on a valuation by the dissenters' expert Howard Gordon. TFL appeals, arguing that the court erred in determining the fair value of TFL shares.

Vermont's Business Corporation Act was amended effective January 1, 1994. See 11A V.S.A. §§ 1.01-20.16; 1993, No. 85, § 7. This case brings the new dissenters' rights chapter of this Act before us for the first time. See 11A V.S.A. §§ 13.01-13.31. Under the new statute, a shareholder of a Vermont corporation who dissents from certain enumerated corporate actions, including consummation of a plan of merger, is entitled to obtain from the corporation payment of the "fair value" of his or her shares. See 11A V.S.A. § 13.02(a)(1). Section 13.01(3) defines "fair value" to mean "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." See id. § 13.01(3). This definition mirrors the definition of "fair value" in the Model Business Corporation Act. See Model Bus.Corp. Act § 13.01 (1978). The official comment to the Model Act indicates that this broad definition "leaves untouched the accumulated case law" on the various methods of determining fair value. Model Bus.Corp.Act § 13.01 cmt. (3).

Dissenters' rights statutes were enacted in response to the common-law rule that required unanimous consent from shareholders to make fundamental changes in a corporation. See Hansen v. 75 Ranch Co., 957 P.2d 32, 37 (Mont.1998). Under this rule, minority shareholders could block corporate change by refusing to cooperate in hopes of establishing a nuisance value for their shares. See id.; see also Model Bus.Corp.Act, ch. 13, Intro. Cmt. (minority demands could be motivated by hope of nuisance settlement). In response, legislatures enacted statutes authorizing corporate changes by majority vote. See Hansen, 957 P.2d at 37. To protect the interests of minority shareholders, the statutes generally permitted a dissenting minority to recover the appraised value of its shares. See id. Most recent statutes allow dissenting shareholders to demand that the corporation buy back shares at fair value. See id.

The basic concept of fair value under a dissenters' rights statute is that the stockholder is entitled to be paid for his or her "proportionate interest in a going concern." Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del.1983); accord In re Valuation of Common Stock of McLoon Oil Co., 565 A.2d 997, 1004 (Me.1989); Friedman v. Beway Realty Corp., 87 N.Y.2d 161, 638 N.Y.S.2d 399, 661 N.E.2d 972, 976 (1995). The focus of the valuation "is not the stock as a commodity, but rather the stock only as it represents a proportionate part of the enterprise as a whole." McLoon Oil, 565 A.2d at 1004. Thus, to find fair value, the trial court must determine the best price a single buyer could reasonably be expected to pay for the corporation as an entirety and prorate this value equally among all shares of its common stock. See id. Under this method, all shares of the corporation have the same fair value. See id.

A dissenting shareholder is not in the position of a willing seller, however, and thus, courts have held that fair value cannot be equated with "fair market value." See, e.g., McLoon Oil, 565 A.2d at 1005; Hansen, 957 P.2d at 41. Accordingly, methods of stock valuation used in tax, probate or divorce cases to determine fair market value are inapposite to the determination of "fair value" under the dissenters' rights statute. See McLoon Oil, 565 A.2d at 1004 (stock valuation method used in tax and probate cases not applicable); Hansen, 957 P.2d at 40 (fair market valuation for purposes of property distribution in marriage distinguishable from fair value for purposes of dissenters' rights). A shareholder who disapproves of a proposed merger gives up the right of veto in exchange for the right to be bought out at "fair value," not at market value. See Hansen, 957 P.2d at 41.

Finally, a fair-value determination is "necessarily a fact-specific process." McLoon Oil, 565 A.2d at 1003; accord Bogosian v. Woloohojian, 882 F.Supp. 258, 261 (D.R.I.1995). "[T]he weight to be given to particular evidence is a matter within the sound discretion of the trial court." Waller v. American Int'l Distrib. Corp., 167 Vt. 388, 394, 706 A.2d 460, 463 (1997); see also Chokel v. First Nat'l Supermarkets, Inc., 421 Mass. 631, 660 N.E.2d 644, 650 (1996) (valuation of dissenting shareholder's stock is question of fact within discretion of trial judge). Moreover, the trial court's findings of fact will not be set aside unless clearly erroneous. See V.R.C.P. 52(a). We now address TFL's arguments in turn.

I.

TFL first argues that the trial court's valuation was clearly erroneous because it relied on the testimony of the dissenters' expert, Gordon, and rejected the testimony of TFL's expert, Haut. Although we do not find it necessary to detail the valuations by each expert to address the legal issues presented, an overview of the two approaches provides some context for our discussion. The dissenters' expert, Gordon, a certified financial analyst, conducted his appraisal using a net-asset-value approach; he used different methods to arrive at the values for individual assets, which were the lodge, the guest house option, the other guest house subsidiary assets, the royalties, and the excess land. Gordon used two methods to determine the value of the lodge. First, he used a discounted-cash-flow method; the value of the lodge added to the value of TFL's other assets resulted in a share value of $64.00. Second, Gordon recalculated the net assets value using a prior real estate appraisal by Frank Bredice for the lodge; the Bredice value of the lodge added to the other TFL assets resulted in a share value of $62.67. Averaging these results, Gordon determined that the fair value of TFL was $63.44 per share.

TFL's expert, Haut, a certified public accountant, separated TFL's assets into three separate groups: the lodge facility and related operations, the excess land, and the guest house option. He used a capitalized-cash-flow method to value the lodge facility, relied upon the Bredice appraisal to determine the value of the excess land, and valued the guest house option by discounting the option price to a present value. Using these...