Oakridge Energy, Inc. v. Clifton
| Decision Date | 18 April 1997 |
| Docket Number | No. 960049,960049 |
| Parties | 315 Utah Adv. Rep. 10 OAKRIDGE ENERGY, INC., Plaintiff and Appellee, v. Martin Taylor CLIFTON, Thomas A. Clifton, Thomas A. Clifton Jr., James A. Ruffalo, Nancy J. Sullivan, Defendants and Appellants. |
| Court | Utah Supreme Court |
Eric C. Olson, Salt Lake City, for plaintiff.
R. Willis Orton, Gregory N. Jones, Salt Lake City, for defendants.
Shareholders dissenting from a sale of corporate assets appeal from the trial court's judgment that, for purposes of the statute giving them a right to appraisal and payment, the "fair market value" of their shares equals the stock market price. We must decide the proper basis for stock valuation under Utah Code Ann. § 16-10a-1302 (1995).
Oakridge Energy, Inc., a Utah oil and gas development company with assets in Texas, Nevada, and Colorado, sold its South Texas properties to Cometra Oil and Gas, Inc. in May of 1993 for $21.5 million. The transaction constituted a sale of "substantially all" of Oakridge's property for purposes of Utah Code Ann. § 16-10a-1302(c) (1995) and thereby conferred on shareholders the right to dissent from the transaction and receive "fair value" for their shares. Minority shareholders in Oakridge Energy, Inc., who constitute the defendants in this case, exercised this right. Section 16-10a-1302 provides in relevant part:
(1) A shareholder, whether or not entitled to vote, is entitled to dissent from, and obtain payment of the fair value of shares held by him in the event of, any of the following corporate actions:
....
(c) Consummation of a sale, lease, exchange, or other disposition of all, or substantially all, of the property of the corporation for which a shareholder vote is required.
" '[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." Utah Code Ann. § 16-10a-1301(4) (1995).
Oakridge announced the terms of the Cometra sale on May 24, 1993. Dissenters exercised their rights as dissenting shareholders on September 27, 1993, and the remaining shareholders approved the sale by vote on September 28. The sale closed the same day, but the provisions were made retroactive to May 1, 1993. The notice of the annual stockholders' meeting at which the sale was approved included unaudited pro forma financial information that took the effects of the sale into consideration and gave the Oakridge stock a book value of $3.36 per share. To compensate the dissenters however, Oakridge used the stock market price to determine that the "fair value" of the shares immediately before the vote was $2.50 per share. Oakridge then added a $0.25 dividend declared in connection with the Cometra sale and sent payment of $2.75 per share to the dissenting shareholders as required by Utah Code Ann. § 16-10a-1325. Dissenters accepted payment but subsequently exercised their appraisal rights under sections 16-10a-1328 and -1330, 1 claiming a value in excess of $3.36 per share. Oakridge then petitioned the trial court for a valuation of the stock.
At trial, Oakridge presented evidence that the stock's over-the-counter trading price ranged between a low of $1.37 and a high of $2.56 per share. The dissenters contended that the stock was "thinly traded," and therefore the stock price was not an adequate indicator of value. They maintained that the per share net asset value, taking the Cometra sale into account, was $3.57. In contrast, Oakridge relied upon a 1993 evaluation by petroleum engineer Aaron Cawley, who had performed an annual evaluation of Oakridge's oil and gas properties for several years prior to the Cometra sale. His valuation considered geological factors, production and operating cost history, and future production forecasts prior to the Cometra sale. Based on the information obtained for his annual published report, Cawley testified at trial that the fair market value of all of the Oakridge oil and gas reserves did not exceed $8.5 million. Using this asset value, Oakridge attempted to determine the "fair market value" of the stock as of August 31, 1993, and arrived at a total shareholder equity of $14,767,948, or $2.13 per share.
The trial court concluded that the "fair value" of the stock equaled the "market value." That is, "the value a shareholder would receive for his or her stock in an arms-length transaction." Dissenters argue that the fair value is not the equivalent of market value
but that the court must weigh three factors: (1) the market value, (2) the asset value, and (3) the investment value. Inconsistently, however, the dissenters urge this court to determine the fair value solely upon the net asset value as reflected by the $21.5 million sale and suggest the weighing of the three factors only in the alternative. Oakridge responds that the trial court correctly disregarded the Cometra sale in determining the value of the Oakridge stock. Neither party presented evidence of the stock's investment value.
The determination of what constitutes fair value under section 16-10a-1302 is a case of first impression in Utah. However, a number of courts in jurisdictions with similar statutes have addressed this issue. In Woodward v. Quigley, 257 Iowa 1077, 133 N.W.2d 38 (1965), the Supreme Court of Iowa recognized that the " 'real object [of valuing shares] is to ascertain the actual worth of that which the dissenter loses because of his unwillingness to go along with the controlling stockholders.' " Id. 133 N.W.2d at 42 (quoting Warren v. Baltimore Transit Co., 220 Md. 478, 154 A.2d 796, 799 (1959)). In In re Valuation of Common Stock of Libby, McNeill & Libby, 406 A.2d 54, 60 (Me.1979), the Supreme Judicial Court of Maine observed that "[a]mong other jurisdictions with valuation statutes similar to our own, we do find ... a consensus that the component elements to be relied upon in determining 'fair value' are stock market price, investment value, and net asset value" (footnote omitted). This observation echoes the earlier statement of the Iowa court that the "three standards that have received almost universal recognition in appraising the intrinsic value of stock under statutes of this type are (1) market value of the stock, (2) net asset value of the corporation, and (3) investment value." Woodward, 133 N.W.2d at 40 (citation omitted). Consequently, "since intrinsic or true value is to be ascertained, the problem will not be settled by the acceptance as the sole measure of only one element entering into value without considering other elements." Bell v. Kirby Lumber Corp., 413 A.2d 137, 141 (Del.1980). In Piemonte v. New Boston Garden Corp., 377 Mass. 719, 387 N.E.2d 1145, 1148 (1979), the Supreme Judicial Court of Massachusetts followed the Delaware procedure and stated that determination of the fair value "calls for a determination of the market value, the earnings value, and the net asset value of the stock, followed by the assignment of a percentage weight to each of the elements of value." We will discuss market value, investment value, and asset value in that order.
In the instant case the trial court relied solely upon the market price of the stock in determining the fair value of the dissenters' shares. It is true that where "the evidence reveals the existence of a free and open market, characterized by a substantial volume of transactions that makes the market a fair reflection of the judgment of the investing public, a court may justifiably assign a greater weight to stock market price than to net asset value or investment value." Libby, 406 A.2d at 63. However, "market value may not be taken as the sole measure of the value of the stock." Bell, 413 A.2d at 141.
Market value of the stock, if it is possible to establish a value through sales on the open market, is a factor to be considered, but is not too dependable as a guide to intrinsic worth. The market price is subject to fluctuation for many reasons other than the intrinsic worth of the stock or the condition of the corporation.
The Libby court observed that Libby, 406 A.2d at 66 (citation omitted). Investment value represents an estimate of the corporation's earning capacity and is fixed in a two-step process. First, an average annual earnings figure is calculated based on the corporation's recent earnings history, excluding unusual gains and losses. Second, a capitalization ratio or earnings multiplier is selected. The investment value of the corporation is the product of the capitalization ratio and the average earnings figure. Id. at 65. Consequently, courts have traditionally favored investment value,...
To continue reading
Request your trial
-
Peterson v. Jackson
...Inc., 2002 UT 121, ¶ 18, 63 P.3d 80; that, of these, the investment value has been traditionally favored, see Oakridge Energy, Inc. v. Clifton, 937 P.2d 130, 133 (Utah 1997); and that, unless the company is being liquidated, the asset approach “ ‘is the least reliable,’ ” see Bingham Consol......
-
Bingham Consol. Co. v. Groesbeck
...of that which the dissenter loses because of his unwillingness to go along with the controlling stockholders." Oakridge Energy, Inc. v. Clifton, 937 P.2d 130, 132 (Utah 1997) (quotations and citations omitted). There are no fixed methods for valuating shares, and most courts permit "all gen......
-
Utah Res. Int'l, Inc. v. Mark Techs. Corp.
...event] must be excluded” in determining fair value.51 ¶ 37 Two of our cases address what constitutes “fair value.” First, in Oakridge Energy, Inc. v. Clifton, we adopted what is commonly referred to as the Delaware Block Method.52 Under that approach, “the three most recognized and relevant......
-
Radman v. Flanders Corp.
...value may not influence the result in every valuation proceeding.'" Id. ¶ 18 (alteration in original) (quoting Oakridge Energy, Inc. v. Clifton, 937 P.2d 130, 135 (Utah 1997)). Second, the trial court here did initially consider more than asset value, finding both that "GFI had no inherent ......
-
Article Title: Fair Value in Utah
...inherent value. 2. Uniform Standards of Professional Appraisal Practice, Standards Rule 10-2 (a) (v). 3. Oakridge Energy, Inc. v. Clifton, 937 P.2d 130, 315 (Utah 1997). 4. Pratt, Shannon P., Robert F. Reilly, and Robert P. Schweihs. Valuing a Business: The Analysis and Appraisal of Closely......