Sieg Co. v. Kelly, 96-61

• Decision Date: 17 September 1997
• Docket Number: No. 96-61,96-61
• Citation: 568 N.W.2d 794
• Parties: SIEG COMPANY, Appellee, v. Denis M. KELLY, Individually and as Successor Trustee of the Ann M. Kelly Grantor Trust, and John F. Kelly, Appellants.
• Court: Iowa Supreme Court

Page 794

568 N.W.2d 794

SIEG COMPANY, Appellee, v. Denis M. KELLY, Individually and as Successor Trustee of the Ann M. Kelly Grantor Trust, and John F. Kelly, Appellants.

No. 96-61.

Supreme Court of Iowa.

Sept. 17, 1997.

Gerald J. Newbrough and Thomas M. Zurek of Nyemaster, Goode, McLaughlin, Voigts, West, Hansell & O'Brien, P.C., Des Moines, for appellants.

Michael L. Noyes and Teri A. Sandeman of Noyes & Gosma, Davenport, for appellee.

Considered by LARSON, P.J., and CARTER, SNELL, ANDREASEN, and TERNUS, JJ.

TERNUS, Justice.

This action is brought pursuant to Iowa Code chapter 490 (1993) to obtain a court appraisal of the fair value of stock owned by appellants. Appellants are shareholders of Sieg-Fort Dodge Company who dissented to the merger of Sieg-Fort Dodge into appellee Sieg Company (hereinafter "Sieg"). The dissenters rejected the price offered by Sieg for the purchase of their stock and as a consequence, Sieg filed this appraisal action. After a bench trial resulted in a valuation unsatisfactory to the dissenters, they appealed the district court's judgment, claiming error not only in the court's appraisal, but also in the court's refusal to award attorney fees. Finding no error, we affirm.

I. Background Facts.

At the time of the events giving rise to this action, Sieg was a large wholesale distributor of automobile parts and supplies. Prior to 1989, it did business through several independently-managed subsidiaries. Sieg-Fort Dodge was one of Sieg's subsidiaries through Sieg's majority ownership of Sieg Rockford Co.; Sieg Rockford owned 86% of Sieg-Fort Dodge. Appellants Denis M. Kelly, the Ann M. Kelly Grantor Trust, and John F. Kelly (hereinafter "Kellys") were minority shareholders of Sieg-Fort Dodge.

Historically, Sieg-Fort Dodge was very successful. Through early 1989, it had sizable net profits and paid dividends to its shareholders each year. Sieg was also profitable until the late 1980s when large losses on its nonautoparts-business investments put it on the verge of bankruptcy. Sieg hired Maddus Sulg as its new president to return it to solvency.

Sulg implemented remedial measures to address Sieg's problems, including the consolidation of its operations. This consolidation was accomplished by merging several subsidiaries into Sieg. ¹ Sieg-Fort Dodge and Sieg Rockford survived these mergers, and Sieg-Fort Dodge actually grew through its acquisition of the assets and operations of several of the merged subsidiaries. These acquisitions occurred through stock-for-stock transactions, using newly-issued Sieg-Fort Dodge stock. (The dissenters now claim the issuance of this stock violated their preemptive stock rights.)

After these mergers were completed, Sieg began to manage and operate Sieg-Fort Dodge and Sieg Rockford as divisions of Sieg. Sieg replaced Sieg-Fort Dodge's board members and officers with individuals who were also board members and officers of Sieg. Sulg became chairman of the board and the chief executive officer of Sieg-Fort Dodge.

During this same period, Sieg began to collect a 4% management fee from its subsidiaries and a 1% charge for the use of its name and service mark. It also lowered prices on the products sold by it and its surviving subsidiaries to increase their market share. These measures had the effect of eliminating Sieg-Fort Dodge's profit margin. Consequently, by 1993, Sieg-Fort Dodge was no longer an autonomous, profitable company; it had become an unprofitable business managed by Sieg.

Despite Sulg's efforts, Sieg continued to lose money. In August 1993, the company fired Sulg and hired a new chief executive officer, Douglas Kratz. Kratz's mission was to reverse Sieg's downward spiral. Kratz implemented several badly-needed management systems and negotiated some breathing room with Sieg's bankers and vendors who were owed over $10 million. Nevertheless, at the end of November, Sieg's principal lender demanded payment of its $7 million loan. Kratz then found a new lender who agreed to loan Sieg $10 million on certain conditions. These conditions included requirements that Sieg raise an additional $2.25 million of capital and that some of the funds raised be used to merge Sieg-Fort Dodge and Sieg Rockford into Sieg.

Kratz presented a reorganization plan to Sieg's board that would fulfill the conditions of Sieg's new lender. Pursuant to this plan, approved by Sieg's directors, the required capital was raised by the sale of Sieg preferred stock. This stock was purchased by Kratz, other directors and officers of Sieg, and by a close friend of Kratz. Sieg-Fort Dodge and Sieg Rockford were to be formally merged into Sieg. Part of the proceeds from the sale of the Sieg preferred stock was set aside to buy out the subsidiaries' minority shareholders.

To accomplish the merger, all Sieg-Fort Dodge shareholders were offered cash or Sieg stock for their shares. The cash price was $22.60 per share, Sieg's estimate of the fair value of Sieg-Fort Dodge stock. This figure was approximately 73% of book value. The Kellys rejected Sieg's offer and demanded $184.59 per share. On February 21, 1994, the merger of Sieg-Fort Dodge was approved by its shareholders. The formal merger occurred the next day.

Following the merger, Sieg received an unsolicited inquiry from a business broker, asking if Sieg was willing to sell its assets. In May 1994, Sieg representatives met with representatives of A.P.S., which does business under the name of Big A Autoparts. By September, Sieg had sold its assets, excluding real estate, to A.P.S. A.P.S. paid book value for these assets, plus a $10 million premium for market share, goodwill, and distribution network, also referred to as Sieg's enterprise or franchise value.

Additional facts will be discussed in connection with our consideration of the issues raised by the Kellys in this appeal.

II. History of Proceedings.

The merger of Sieg-Fort Dodge was accomplished pursuant to the provisions of Iowa's Business Corporation Act, Iowa Code chapter 490. Chapter 490 gives shareholders the right to dissent from certain corporate actions and be paid the "fair value" of their shares in the company. See Iowa Code §§ 490.1301--.1331. If the dissenters and the corporation cannot agree on the fair value of the dissenters' shares, the corporation must commence an action to determine fair value. Id. § 490.1330(1). The present case is such an action.

Following a bench trial, the district court established the fair value of the Kellys' stock to be $62.67 per share. It denied the Kellys' request for an award of attorney fees. See id. § 490.1331(2) (allowing an award of attorney fees against corporation if certain conditions are met).

The Kellys appealed. They contend (1) the trial court should have adopted their expert's opinion of fair value, and (2) the trial court erred in failing to award attorney fees. The error claimed with respect to the court's appraisal of the dissenters' stock is twofold: (1) the trial court should have ignored the disastrous consequences of Sieg's management of Sieg-Fort Dodge in the years prior to the merger; and (2) the court should have attributed a proportionate share of the $10 million premium subsequently paid by A.P.S. for Sieg's franchise value to the franchise value of Sieg-Fort Dodge.

III. Scope of Review.

Actions to determine the value of dissenters' shares pursuant to section 490.1330 are at law. Sieg Co. v. Kelly, 512 N.W.2d 275, 278 (Iowa 1994) [hereinafter referred to as Sieg I ]. Consequently, our review is for errors of law. Id. The district court's findings of fact are binding on us if supported by substantial evidence. Iowa R.App. P. 14(f)(1).

IV. Determination of Fair Value.

We begin our consideration of the Kellys' challenge to the court's appraisal of their stock with a review of the applicable law governing such an appraisal. The focus of an action under section 490.1330 is the determination of the "fair value" of the dissenters' shares. See Iowa Code § 490.1330(1) (providing for a court appraisal of the "fair value" of dissenters' shares). The term "fair value" is defined in chapter 490:

"Fair 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 unless exclusion would be inequitable.

Id. § 490.1301(4). This definition is taken from the Model Business Corporation Act. 3 Model Bus. Corp. Act Ann. § 13.01(3), at 1356 (3d ed. Supp.1986) [hereinafter Model Bus. Corp. Act].

A. Factors to be considered. Initially, it is important to remember that the date of valuation is "immediately before" the corporate action to which the dissenters object. Consequently, it is the value of the stock on that date, not some prior or subsequent date, that is important. This fact influences the events and factors that may properly be considered by the court, as we now discuss.

The objective of a fair-value determination "is to ascertain the actual worth of that which the dissenter loses because of his unwillingness to go along with the controlling stockholders." Woodward v. Quigley, 257 Iowa 1077, 1085, 133 N.W.2d 38, 42 (quoting Warren v. Baltimore Transit Co., 220 Md. 478, 154 A.2d 796 (1959)), modified on reh'g, 257 Iowa 1077, 136 N.W.2d 280 (1965). As we have observed on prior occasions, there is no predominant formula for arriving at fair value. Security State Bank v. Ziegeldorf, 554 N.W.2d 884, 888 (Iowa 1996); Sieg I, 512 N.W.2d at 278. The approaches to stock valuation usually relied upon by the court are "(1) market value of the stock; (2) net asset value of the corporation; and (3) investment value." Security State Bank, 554 N.W.2d at 888-89. The usefulness of any particular approach depends on the facts and circumstances of each case. Id. at 889. The court should consider any relevant factor not...