Richardson v. Palmer Broadcasting Co.
| Decision Date | 18 July 1984 |
| Docket Number | No. 83-168,83-168 |
| Citation | 353 N.W.2d 374 |
| Parties | Julie H. RICHARDSON and William B. Richardson, Executors of the Estate of Burdick N. Richardson, Deceased, Parker H. Ficke, Successor Trustee of the Trust Under the Will of G.H. Ficke, Deceased, Charles Blair, Executor of the Estate of Lucy R. Walsh, Deceased, Appellees, v. PALMER BROADCASTING COMPANY, an Iowa Corporation, and Palmer Broadcasting Company, A Delaware Corporation, Appellants. |
| Court | Iowa Supreme Court |
Charles Blair and Edward B. Harris of Nagle, Blair & Harris, Davenport, for appellees.
R. Richard Bittner and Robert D. Lambert of Betty, Neuman, McMahon, Hellstrom & Bittner, Davenport, and Albert H. Turkus of Dow, Lohnes & Albertson, Washington, D.C., for appellants.
Considered by REYNOLDSON, C.J., and McCORMICK, SCHULTZ, CARTER and WOLLE, JJ.
The issue on this appeal concerns the determination of the "fair value" of 128 shares of stock in Palmer Broadcasting Company, an Iowa corporation, which were owned by shareholders who dissented from a plan of merger of that corporation with Palmer Broadcasting Company, a Delaware corporation. The dissenting shareholders are entitled to such determination of fair value under Iowa Code section 496A.78 (1977). The district court found the fair value to be $1115 per share and both the dissenting shareholders and the merged corporations have appealed from this determination.
The merger in question was effective on September 9, 1977. Prior to that time, plaintiffs were notified and offered $350 per share for the surrender of their certificates. Plaintiffs rejected that offer and demanded that the corporation pay them the fair value of said shares to be determined under Iowa Code section 496A.78 (1977) which provides in part:
[S]uch corporation shall pay to such shareholder, upon surrender of the certificate or certificates representing such shares, the fair value thereof as of the day prior to the date on which the vote was taken approving the proposed corporate action....
If ... the dissenting shareholder and the corporation do not agree [upon the fair value of such shares], then the dissenting shareholder may ... file a petition ... asking for a finding and determination of the fair value of such shares, and shall be entitled to judgment against the corporation for the amount of such fair value...
At the time of the merger there were 25,450 outstanding shares of stock in Palmer Broadcasting Company, an Iowa corporation. The corporation owned the WOC Broadcasting Company of Davenport, consisting of stations WOC-TV, WOC-AM, and KIIK-FM; WHO Broadcasting Company of Des Moines, consisting of WHO-TV, WHO-AM, and KLYF-FM; Gulf Coast Television and Radio Naples of Naples, Florida, comprised of cable television franchises and WNOG-AM and WCVU-FM; and Coachella Valley Television of Palm Desert, California, a cable television company.
Palmer Broadcasting Company stock has never been listed on any stock exchange. In 1976 and 1977 it paid a dividend of $3.00 per share. During the period 1967 and 1977, the corporation redeemed stock at prices between $200 and $268 per share, total shares redeemed being 1593, with sales of 4 shares to 848 shares per transaction. There have been no other sales except these redemptions. These shares were redeemed at "book value" as determined by an audit and were not necessarily "fair value." In May of 1977, 4 shares of stock were redeemed by the corporation at $250 per share.
The "book value" for Palmer Broadcasting Company for years ending 1975, 1976 and 1977 was $419.32 per share, $488.11 per share, and $562.03 per share, respectively. Net income for Palmer Broadcasting Company was $869,386 in 1974, $1,219,559 in 1975, and $1,863,660 in 1976, for a three-year average of $1,317,535. The corporation had retained earnings of $8,024,281 in 1975, $9,774,774 in 1976, and $11,733,883 in 1977.
Arthur Holt, Jr., testified as an expert witness on behalf of the plaintiffs on the issue of fair value. After reviewing the corporate balance sheets, Federal Communications Commission reports, and comparable sales, he concluded that the "fair value" of the assets of the merging corporation was $66,950,000, resulting in a per share valuation of $2630.64.
Mr. Holt was in the business of appraising in the broadcasting and electronic media industry. After earning a B.A. degree in radio and television broadcasting in 1956, he worked in and managed radio and television stations throughout the United States. He has been licensed by the Federal Communications Commission as an engineer, program director, and general manager and has owned radio stations.
Mr. Holt's definition of "fair value" is what a willing, well-informed buyer would pay a willing, well-informed seller for the property in question. Using this criterion, he separately valued each of the broadcasting components owned by the merging corporation based upon the gross sale price which he believed could be obtained if that component was sold separately. This valuation produced the following results:
WOC-TV $15,500,000
WOC-AM 1,500,000
KIIK-FM 1,750,000
WHO-TV 18,500,000
WHO-AM 5,750,000
KLYF-FM 3,250,000
WNOG-AM 750,000
WCVU-FM 1,850,000
Florida Cable System 9,500,000
California Cable System 8,600,000
Mr. Holt's opinion of fair value was derived by dividing the $66,950,000 total of the above sums by the number of shares outstanding in the corporation. On their cross-appeal, the plaintiffs urge that the trial court should have completely accepted the Holt testimony as the measure of fair value.
Defendant presented Charles H. Kadlec, executive vice president of Frazier, Gross, & Kadlec, Inc., a financial appraisal firm in Washington, D.C. as an expert valuation witness. Mr. Kadlec's interpretation of "fair value" under section 496A.78 is the extent to which a shareholder has been deprived of an opportunity to share in the future earnings of a going corporation. Using a price-earnings ratio method, he calculated the stock price per share based upon a multiple of earnings. That multiple was developed by analyzing the price-earnings ratio of eight publicly traded corporations in the broadcast industry. These eight corporations were chosen from an original list of thirteen after five had been eliminated as being "atypical."
The stock prices for these eight corporations were matched with year-end earnings for the years 1974, 1975 and 1976 to produce the price-earnings ratio which the witness found to be relevant. Based on these comparisons, the witness fixed the price-earning ratio for the merging Iowa corporation at .072 which, when applied to what the witness believed to be a representative annual return based on adjusted averaging of several years earnings produced a price per share of $527. After making this calculation, Mr. Kadlec then attempted to discount the value which it produced because the stock was not readily convertible to cash, and represented a minority interest in a closely held corporation. He believed these circumstances justified a discount in a thirty to forty percent range.
In weighing the competing testimony, the trial court determined that plaintiffs' witness, Arthur Holt, made a number of mathematical errors in the underlying data upon which his conclusions were based. Although the witness subsequently noted these errors, it was his view that they made no difference in his ultimate conclusions. The trial court believed that this witness's valuations were overstated and, in addition, that the method employed by the witness in arriving at his conclusions did not produce an accurate measure of "real value" for purposes of the determination required by section 496A.78.
The trial court concluded that "fair value" under section 496A.78 was intended to compensate the dissenting shareholder for the extent to which he was deprived of an ownership interest in a going concern. As such, the trial court concluded that this was not simply a right to future earnings but a proportionate interest in a going concern to be determined by balancing the net asset value of the company and its investment value.
In applying these conclusions, the trial court found a corrected net asset value to allow for Holt's overstatements was $1335.95 per share. With respect to investment value, the trial court determined that the Kadlec ratio of .072 was not an accurate indicator and that a price-earnings ratio of .10 was more acceptable. The trial court applied that ratio to a three-year average net income for the period 1974-76 and produced a valuation of $570.70 per share. This figure was adjusted upward by adding retained earnings which the trial court believed to be an appropriate adjustment for reaching a final value by use of the price-earnings ratio method. The value thus produced was $967.78 per share. Using a weighted balancing process which attributed sixty percent to the adjusted price-earnings ratio determination and forty percent for the adjusted net asset valuation, the trial court ultimately arrived at the price of $1115 per share as the fair value under section 496A.78.
Nowhere in the Iowa Business Corporation Act is the term "fair value" defined. The section is derived from Model Business Corporations Act section 74 and the official comment to that act simply states: "The cases indicate that there is no definite rule for determining 'fair value' but that the proper result in each case will depend upon the particular circumstances of the corporation involved." In 13 W. Fletcher, Cyclopedia of the Law of Private Corporations, section 5906.12, at 286 (rev. perm. ed. 1980), the author states:
Courts have generally held that no one factor governs the valuation of the shares but that all factors, such as market value,...
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