Phelps v. Watson-Stillman Co.

• Decision Date: 10 September 1956
• Docket Number: WATSON-STILLMAN,No. 45015,No. 2,45015,2
• Citation: 365 Mo. 1124,293 S.W.2d 429
• Parties: Mrs. Betty Norma Leschen PHELPS, Suzanne L. Naunheim, Amy L. Moore, Edna H. Leschen, john A. Leschen, 11, William F. Leschen, and Mary G. Roebling, Plaintiffs-Respondents, v. TheCOMPANY, a Corporation, Defendant-Appellant
• Court: Missouri Supreme Court

Page 429

293 S.W.2d 429

365 Mo. 1124

Mrs. Betty Norma Leschen PHELPS, Suzanne L. Naunheim, Amy L.

Moore, Edna H. Leschen, john A. Leschen, 11,

William F. Leschen, and Mary G.

Roebling, Plaintiffs-Respondents, v. The WATSON-STILLMAN COMPANY, a Corporation, Defendant-Appellant.

No. 45015.

Supreme Court of Missouri, Division No. 2.

Sept. 10, 1956.

Mahlon E. Lewis, Pittsburgh, Joseph Renard, St. Louis, for defendant-appellant. Fordyce, Mayne, Hartman, Renard & Stribling, St. Louis, of counsel.

Thomas S. McPheeters, E. C. Hartman, Thomas S. McPheeters, Jr., for plaintiffs- respondents. Bryan, Cave, McPheeters & McRoberts, hartman & Guilfoil, St. Louis, of counsel.

BARRETT, Commissioner.

Pursuant to the provisions of the General Business Corporation Law, the A. Leschen and Sons Rope Company, a Missouri corporation, was merged or consolidated, V.A.M.S., Secs. 351.410-351.450, with the defendant, Watson-Stillman Company, a New Jersey corporation, on July 30, 1953. The plaintiffs, seven minority stockholders, having duly objected to the consolidation, instituted this statutory proceeding, Matter of Fulton, 257 N.Y. 487, 492, 178 N.E. 766, 768, 79 A.L.R. 608, to have the 'fair value' of their shares determined 'as of the day prior to * * * such merger,' July 29, 1953, and paid by the surviving corporation, the defendant-appellant. V.A.M.S. Sec. 351.455.

The A. Leschen and Sons Rope Company was founded in 1857 and incorporated in 1886. The company manufactured wire rope and related products, and its 'Hercules' wire rope was internationally famous for its quality. On July 29, 1953, there were 28,022 1/2 shares of common stock issued and outstanding out of an authorized 30,000 shares with a par value of $100 a share. Prior to June 1953 all of the outstanding shares were owned by fifty-six people, many of them descendants of the original founders of the company. The stock was not listed upon any stock exchange, had no over-the-counter market, and so, in the semantics of the market place, was a 'close corporation.' Through his almost wholly owned holding company, H. K. Porter Company, Mr. Thomas M. Evans of Pittsburgh, Pa., acquired by purchase approximately 70% of the outstanding shares of stock of A. Leschen and Sons Rope Company for the agreed price of $75 a share, eventually acquiring 20,116 1/2 shares for the total price of $1,515,637.50 (which included 276 shares of employee-owned stock for which he was required to pay $100 per share). Included, incidentally, in those who sold majority control for $75 a share were three of the plaintiffs who sold 1,184 of their shares. Thereafter, when it was proposed by the new majority stockholders, in effect H. K. Porter Company, to merge the A. Leschen and Sons Rope Company with the Watson-stillman Company, a wholly owned subsidiary of H. K. Porter Company, the seven plaintiffs, owners of 7,846 shares of the capital stock of A. Leschen and Sons Rope Company, objected to the merger and, upon consummation of the merger on July 30, 1953, instituted this proceeding to have the 'fair value' of their stock determined and paid. At the instigation of the defendant the proceeding was referred to a referee who, after certain adjustments, found the fair value of the 7,846 shares to be $184.80 a share. The finding of the referee was affirmed by the Circuit Court of the City of St. Louis and the defendant, Watson-Stillman Company, has appealed from the final judgment fixing the value of the 7,846 shares at $1,598,318.07 and the award to the referee of $30,000 for his services.

In their amended petition the plaintiffs asserted that the fair value of their stock was $231.76 a share. They arrived at that figure by establishing the net asset value of the company on July 29, 1953, to be $6,494,531, which divided by the total number of shares outstanding, 28,022 1/2, produced a per share value of $231.76. The net asset value was determined by first establishing from the company's balance sheet of July 31, 1953, the stockholders' equity in the company of $5,492,477, capital stock of $2,802,250 plus retained earnings of $2,690,277. To the stockholders' equity there was added to the inventory the sum of $1,017,717 by reason of the conservative 'Lifo' method of accounting, $17,551, the value of a subsidiary and the sum of $225,733 representing excess of appraised value of real estate over the amount shown in the balance sheet--all for a total of $6,753,478. From this sum was deducted $232,000 for an inventory loss, established after July 31 and a discount of $26,947 allowed on accounts receivable, thus establishing a net asset value of $6,494,531 or a per share value of $231.76. As stated, the referee made certain adjustments in these computations and reduced the net total assets to $5,178,512.95, thus arriving at the adjudged per share value of $184.80. The referee was of the opinion that these figures were unchallenged and therefore was of the view that he could not alter them or the values produced by these computations.

This method of arriving at the per share value of stock, which the referee and the trial court employed, is known as the 'net asset theory' of valuation and throughout the trial of the proceedings and here the plaintiffs have urged its validity and applicability to the particular circumstances of this case. We cannot agree with the plaintiffs that any jurisdiction or authority, except in very limited instances, has adopted or advocated this method of arriving at the fair value of minority stock under statutes permitting majority merger or consolidation. As urged by the plaintiffs and applied by the trial court, asset value was employed in its narrow meaning of 'liquidation value,' and while asset value is an important factor for consideration, the most significant in the particular circumstances of this case it may be noted, it is rarely if ever the exclusively determinative factor. Annotation 38 A.L.R.2d 442, 446. American General Corp. v. Camp, 171 Md. 629, 190 A. 225, is often referred to for the emphasis it apparently placed upon net asset value. Aside from the vast difference in appellate review--deferring to the finding of appraisers and altering an award for errors of law only, the Maryland court recognized that the determination of fair value of dissenting stock was 'a speical problem in every particular instance.' In that case the merged corporations were engaged in the business of purchasing and selling shares of stock, bonds and mortgages, consequently their assets were liquid and quickly convertible into cash. The appraisers in that case examined earnings and market value but gave them no consideration because of their lack of weight in the particular circumstances. In this case subsequent events have demonstrated the liquidity of certain of A. Leschen and Sons Rope Company's assets. Accounts receivable, some inventory and some real estate were converted into cash within a few months and $1,800,000 cash has been transferred from the Leschen Company assets to the Watson-Stillman Company. In this respect there is some analogy in the circumstances of the two cases, accounting, in part, for the weight to be attributed to net asset value, but not the 100% weight given by the trial court. Despite the analogy and even its possible advisability, the A. Leschen and Sons Rope Company was not in point of fact liquidated, V.A.M.S. Secs. 351.460-351.480, it was merged or consolidated under the statutes, V.A.M.S. Secs. 351.410-351.455, and the dissenting stock must be valued accordingly. Another startling example of liquid assets is Chicago Corporation v. Munds, 20 Del.Ch. 142, 172 A. 452, where $21,658,694.02 of assets consisted of over three million dollars in cash, three million dollars in short term securities and notes and over fifteen million dollars in stocks and bonds. But in that case too much emphasis was placed upon quoted market value with the result that the appraisers' report was rejected. Ahlenius v. Bunn & Humphreys, 358 Ill. 155, 192 N.E. 824, 829, 95 A.L.R. 913, is also often cited for its supposed emphasis on net asset value. But the Supreme Court of Illinois pointed out that the stock was to be valued 'by the fair market vaule of the corporate property as an established and going business', and said that 'Precise rules for determining the value, whatever the descriptive term used, cannot be laid down.' The court pointed out in great detail the factors to be considered even though 'The very nature of most cases precludes proof of value and damage with the precision of mathematical computation. A situation is presented which calls for the exercise of judgment upon consideration of every relevant evidential fact and circumstance entering into the value of the corporate property and reflecting itself in the worth of corporate stock.' The basic difficulty with the net asset theory is that it ignores the policy and purpose of the statutes permitting majority consolidation and the valuation of shares of dissenting minority stockholders. Chicago Corp. v. Munds, supra; Ballantine, Corporations, Sec. 289, p. 681; 45 Har.L.R. 233; 32 Col.L.R. 60 ¹.

In the various statutes the terms 'value,' 'fair value,' 'fair cash value' and 'fair market value' are abstract and in a sense perhaps meaningless (2 Bonbright, Valuation of Property, p. 827); they nevertheless have the same general meaning and purposefully if not wisely establish a flexible general standard for fixing value between parties who are either unable or unwilling to voluntarily agree. Ballantine, Corporations, Sec. 299, pp. 704-706; Anderson v. International Minerals & Chemical Corp., 295 N.Y. 343, 67 N.E.2d 573. As previously noted, there is no simple mathematical formula and each case presents its particular problem, but in general some of the factors to be considered and weighted are asset value, earnings, dividends, management and 'every relevant fact and circumstance which enters into the...