Offenbecher v. Baron Services, Inc.

• Citation: 874 So.2d 532
• Parties: James OFFENBECHER v. BARON SERVICES, INC.
• Decision Date: 10 May 2002
• Court: Alabama Court of Civil Appeals

874 So.2d 532

James OFFENBECHER v. BARON SERVICES, INC.

2000025.

Court of Civil Appeals of Alabama.

May 10, 2002.

S. Mitchell Howie, Huntsville, for appellant.

Frank McRight of Lanier Ford Shaver & Payne, P.C., Huntsville, for appellee.

On Application for Rehearing

MURDOCK, Judge.

This court's opinion of May 18, 2001, is withdrawn, and the following is substituted therefor.

Baron Services, Inc., acting pursuant to § 10-2B-13.30, Ala.Code 1975, sued James Offenbecher, one of its minority shareholders, seeking a determination of the fair value of Offenbecher's stock. Baron Services paid $72,488.49, its estimate of the value of Offenbecher's 130 shares of Baron Services stock, into the court. After the parties had conducted discovery, the trial court conducted a nonjury trial. On April 13, 2000, the court entered a judgment in favor of Baron Services, directing Offenbecher to deliver his shares to Baron Services in exchange for the funds Baron Services had paid into the court. Offenbecher filed a postjudgment motion pursuant to Rule 59, Ala. R. Civ. P. Baron Services moved for an award of an attorney fee. The trial court denied both motions. Offenbecher appealed to the Supreme Court of Alabama, which transferred the appeal to this court, pursuant to § 12-2-7(6), Ala.Code 1975.

On appeal, Offenbecher argues that the court erred in its determination of the number of outstanding shares of Baron Services stock and in failing to award him an attorney fee. Offenbecher also challenges the propriety of the court's use of a 50 percent marketability discount in calculating the fair value of the stock of Baron Services.

The record reveals that Baron Services was incorporated in 1990 by Bob Baron; the company sold weather-radar systems and related software. In 1990, Bob Baron gave Offenbecher, who had designed some software for Baron Services, 130 shares of Baron Services stock. Baron Services made no profit in its first few years of operation, selling only 10 radar systems. Baron Services earned profits of $59,847 in 1994; $22,480 in 1995; and $165,434 in 1996. However, in 1997, Baron Services sold 23 radar systems, and its profits soared to $735,261.

On March 31, 1998, the board of directors of Baron Services, which was controlled by its majority shareholders, approved a plan to merge Baron Services into a separate Delaware corporation.¹ The Baron Services board's merger plan included a "cash-out" provision providing for a cash payment to any shareholder owning fewer than 150 shares of Baron Services, while denying such shareholder any ownership stake in the Delaware corporation after the merger. In response to the merger proposal, Offenbecher demanded payment from Baron Services for the fair value of his 130 shares of stock in that company. The parties' subsequent disagreements concerning the value of his ownership stake (both monetarily and in relation to the total outstanding shareholders' equity), resulted in the instant litigation.

Offenbecher argues, without any citation to authority, that the trial court erred in determining the number of Baron Services shares that were outstanding. In 1991, Baron Services issued 2,000 shares of stock to Oakley Baron, Bob Baron's father. Baron Services presented evidence, including stock certificates, indicating that Oakley Baron purchased the 2,000 shares of stock for $20,000. Offenbecher argues that Oakley Baron actually lent Baron Services $20,000 and that Baron Services improperly issued the shares of stock to him. In support of his argument, Offenbecher points to a letter from Oakley Baron to Bob Baron; the letter stated that Bob Baron could repurchase the stock when he had the money to do so. Offenbecher argues that Oakley Baron's letter clearly indicates that the 1991 transaction was a loan from Oakley Baron to Baron Services. Oakley Baron testified to the contrary, stating that he purchased stock in his son's company and that he was willing to resell that stock to his son. The resolution of this conflicting evidence was a factual issue to be determined by the trial court. Where the trial court is presented with ore tenus evidence, its judgment based on its factual findings is entitled to a presumption of correctness on appeal. Gray v. Reynolds, 553 So.2d 79 (Ala.1989); Martin v. Dinmark, 531 So.2d 1234 (Ala.Civ.App.1988). Offenbecher's brief on this issue does not contain any citations to the record or direct this court to any supporting authority. We conclude that Offenbecher has failed to demonstrate that the trial court erred in determining the number of outstanding shares of Baron Services stock.

Offenbecher also argues that the trial court erred, as a matter of law, in accepting a valuation of the fair value of individual shares of Baron Services stock ($547.77)² that included a 50 percent "marketability discount." We note that questions of law are not subject to the ore tenus presumption of correctness. Walker v. Walker, 695 So.2d 58 (Ala.Civ.App.1997).

In entering its judgment, the trial court relied heavily upon the testimony of Gary Saliba, the valuation expert retained by Baron Services. Saliba opined that Baron Services stock as of December 31, 1997, was worth $562.47 per share. In doing so, Saliba initially determined a value of $1,124.94 per share, which he called the "marketable value" of the stock, or the value of each share of stock "on a freely traded basis."³ However, Saliba testified that a 50% "marketability discount" should apply to all the shares of stock for the company; Saliba testified that the marketability discount adjusted for the fact that the company was closely held and was not publicly traded. Saliba's calculation of the value of the Baron Services stock using the marketability discount resulted in a valuation of $562.47 per share as of December 31, 1997. At the request of Baron Services, Saliba later reevaluated the value of the stock, based on management's revised sales and income projections. Saliba's revised valuation indicated a stock value of $547.77 per share, as of December 31, 1997.

In contrast, Bruce Williams, Offenbecher's valuation expert, valued Offenbecher's 130 shares of Baron Services stock, as of April 19, 1998, at $215,000, or $1,653.85 per share. While Williams's opinion was based upon several different valuation assumptions than those made by Saliba, the principal reason for the wide gap between Williams's stock valuation and Saliba's stemmed from Williams's view that the instant case was an inappropriate one for the application of a marketability discount.

Under § 10-2B-13.02(a), Ala.Code 1975 (a portion of the Revised Model Business Corporation Act, or "BCA," as adopted by the Alabama Legislature), a shareholder of a corporation, such as Offenbecher, "is entitled to dissent from, and obtain payment of the fair value of his or her shares in the event of" (emphasis added), certain corporate actions, including mergers such as that undertaken by Baron Services. Under Alabama law, if the corporation's offer of payment is less than what the shareholder believes is the fair value of his or her shares and the corporation wishes to contest the validity of the shareholder's payment demand, the corporation may institute a civil action in which the trial court will enter a "judgment for the amount the court finds to be the fair value of his or her shares, plus accrued interest." Ala.Code 1975, § 10-2B-13.30(f) (emphasis added); see also §§ 10-2B-13.25 and -13.28. Such a statutory right to receive the "fair value" of one's shareholder interest provides a remedy for actual or threatened oppression of minority shareholders, as one commentator notes:

"Minority shareholders are granted limited statutory rights as a check against rampant majority rule. One such right is the ability of shareholders to dissent from certain corporate actions, primarily mergers and other fundamental corporate changes, and to receive the appraised fair value of their shares. This is sometimes known as the dissent and appraisal remedy, dissenters' rights, or, simply, the appraisal remedy....

". . . .

"... Most of the current appraisal litigation involves cash-out mergers, often instituted by a controlling shareholder. The appraisal remedy today serves a minority shareholder protection role, sometimes providing liquidity to shareholders, but most often operating to protect minority shareholders who are cashed out of their investment. The remedy fulfills this function ex ante, deterring insiders from engaging in wrongful transactions, and ex post, providing a remedy to minority shareholders who are subjected to such transactions."

Barry M. Wertheimer, The Shareholders' Appraisal Remedy and How Courts Determine Fair Value, 47 Duke L.J. 613, 613-16 (1998) (footnotes omitted).

What is the "fair value" of a dissenting stockholder's shares? Ala.Code 1975, § 10-2B-13.01(4), defines it as "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." As to the stock of a company that is not publicly traded, "fair value" and "fair market value" are two different things:

"The distinction between the market value of a company as measured by its stock price and the intrinsic value of the company is well known. Nowhere does the [Illinois Business Corporation Act (`BCA')] state that dissenting shareholders are entitled to only the discounted, `market value' of their stock as of the date of the challenged transaction....

"Moreover, the equitable considerations implicit in [choosing] `fair' value as the measure of what dissenting shareholders are entitled to receive for their stock favor an undiscounted measure of stock value. First, the appraisal remedy is designed to protect minority shareholders from the greater risk of oppression by controlling shareholders posed by the

...