Sieg Co. v. Kelly

• Decision Date: 23 February 1994
• Docket Number: No. 92-1392,92-1392
• Citation: 512 N.W.2d 275
• Parties: SIEG COMPANY, Appellant, v. John F. KELLY and Denis M. Kelly, Appellees.
• Court: Iowa Supreme Court

Page 275

512 N.W.2d 275

SIEG COMPANY, Appellant, v. John F. KELLY and Denis M. Kelly, Appellees.

No. 92-1392.

Supreme Court of Iowa.

Feb. 23, 1994.

Thomas D. Hanson and Robert B. Hanson, Hanson, Bjork & Russell, Des Moines, for appellant.

Thomas M. Zurek and Michael W. Thrall, Nyemaster, Goode, McLaughlin, Voigts, West, Hansell & O'Brien, P.C., Des Moines, for appellees.

Considered by HARRIS, P.J., and LAVORATO, NEUMAN, SNELL, and ANDREASEN, JJ.

LAVORATO, Justice.

This is an appeal from a decision of the district court in an appraisal action brought pursuant to Iowa Code section 490.1330 (1991). A holding company sued dissenting stockholders of two subsidiaries that were merged into the holding company. The holding company's suit sought a fair value determination of the dissenting shareholders' stock in the two subsidiaries immediately before the merger. In its appeal, the holding company challenges the district court's fair value determination. We affirm.

I. Background Facts.

Sieg Company--founded in 1869 and incorporated in 1888--is now a large distributor of automobile parts and supplies. Sieg Cedar Rapids and Sieg Sioux City were among its majority-owned subsidiaries. Sieg Cedar Rapids was located in Linn County and Sieg Sioux City was located in Woodbury County.

For several years before 1989, Sieg experienced marginal profits. Diversification into other business ventures was unprofitable and caused Sieg additional financial distress.

In 1989 Sieg hired new management. Management's assessment of Sieg's financial condition, coupled with a first-time certified audit, uncovered several severe problems threatening Sieg's existence.

Management implemented several remedial measures to stem these problems. One was to consolidate operations through mergers of local subsidiaries like Sieg Cedar Rapids and Sieg Sioux City.

On March 28, 1990, Sieg's board of directors entered into separate merger agreements with Sieg Cedar Rapids and Sieg Sioux City. Sieg notified all shareholders of both subsidiaries about this agreement and about the shareholders' rights to (1) dissent and (2) demand appraisal.

Two brothers--John F. Kelly and Denis M. Kelly--each owned 200 shares of stock in Sieg Cedar Rapids. John also owned 140 shares of stock in Sieg Sioux City.

Several weeks following the merger agreement, Sieg notified the Kellys that it would pay them $125 per share for their stock in Sieg Cedar Rapids. Sieg also notified John that it would pay him $62 per share for his stock in Sieg Sioux City. The Kellys deposited their shares and demanded payment pursuant to the merger agreement. See Iowa Code § 490.1323.

Sieg paid the Kellys $25,000 each for their stock in Sieg Cedar Rapids. Sieg also paid John $8680 for his stock in Sieg Sioux City.

Each brother then (1) notified Sieg what he thought his stock was worth, (2) demanded the difference between what Sieg paid him and what he claimed the stock was worth, and (3) demanded appraisal rights. See Iowa Code § 490.1328.

Sieg Cedar Rapids merged with Sieg on July 2, 1990. One week later Sieg Sioux City merged with Sieg. Sieg remains the surviving corporation. Because Sieg did not accede to the Kellys' demands, the completion of the merger set the stage for an appraisal proceeding.

II. Background Proceedings.

Sieg eventually sued the Kellys for an appraisal to determine the fair value of their stock. See Iowa Code § 490.1330. After the Kellys answered, the district court appointed appraisers. At the bench trial Sieg's expert testified in person; the Kellys' expert testified by way of deposition.

After the trial, the district court determined that the fair value for the Sieg Cedar Rapids stock was $258.61 per share and for the Sieg Sioux City stock, $117.95 per share. The court ordered Sieg to pay the Kellys the difference between what it originally had paid them for their stock and the court's determination. This amounted to $34,555 for John and $26,722 for Denis. The court also ordered Sieg to pay the Kellys interest on these amounts.

Sieg then filed a Rule 179(b) motion. See Iowa R.Civ.P. 179(b). In the motion Sieg alleged that the district court had adopted--with one exception--the valuation set by the Kellys' expert. Sieg complained that the valuation was full of factual and legal errors. Specifically, Sieg pointed out that the Kellys' expert had allegedly (1) valued the shares of the two subsidiaries as of an incorrect date, (2) double-counted the value of Sieg Cedar Rapids' investments in other companies when determining the value of Sieg Cedar Rapids' stock, and (3) adopted but misapplied the valuation method developed by Sieg's expert.

At the hearing on the Rule 179(b) motion, the parties--at the court's request--agreed as to what the fair value of the Kellys' stock would be, based on the valuation method the court used in its original ruling. Sieg, however, reserved its right to dispute the valuation method the court used.

Using the figures the parties had agreed upon, the court then reduced the fair value of the Sieg Cedar Rapids stock to $180.50 per share and the fair value of the Sieg Sioux City stock to $117.75 per share. The court overruled Sieg's Rule 179(b) motion in all other respects. The court then entered judgment of $18,905 for John and $11,100 for Denis, together with interest from the date of the petition. The judgment amounts were net figures, reflecting the difference between what Sieg had paid the Kellys and the fair value of their stock as determined by the court.

Thereafter, Sieg appealed.

III. Scope of Review.

Iowa Code section 490.1330 governs the court procedure for determining the value of dissenting shareholders' stock. The section gives no hint whether the action is at law or in equity. So it is not clear whether our review should be for errors at law or de novo.

A predecessor statute--Iowa Code section 496A.78 (1977)--provided that "the action shall be prosecuted as an equitable action and the practice and procedure shall conform to the practice and procedure in equity cases." This language then clearly dictated that our scope of review was de novo. See Richardson v. Palmer Broadcasting Co., 353 N.W.2d 374, 378 (Iowa 1984).

Not surprisingly, the parties disagree on what our scope of review is under section 490.1330. Sieg thinks it is still de novo because the legislature did not clearly manifest its intent to change the nature of the proceedings. The Kellys, on the other hand, believe our review is at law.

We agree with the Kellys that our review is at law. Our current law on corporations--Iowa Code chapter 490, Iowa Business Corporation Act--became effective December 31, 1989. See 1989 Iowa Acts ch. 288. The legislature repealed chapter 496A entirely, replacing it with the new Business Corporation Act. The new act is silent on the nature of a fair value action in district court and how we review such a proceeding. We infer from this that had the legislature intended these actions to remain in equity, it would have said so.

Our conclusion is consistent with the reason one commentator gives for treating appraisal proceedings for dissenting shareholders as legal actions:

In-court appraisal proceedings have been characterized as legal, as opposed to equitable actions, because of their historical limitation of the dissenting shareholder to the legal remedy of damages, in the amount of the value of that shareholder's stock.

12B William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 5906.10, at 378 (perm. ed. rev. vol. 1993). Our law similarly limits a dissenting shareholder's remedy to an award of monetary damages for the fair value of the shareholder's stock. See Iowa Code § 490.1330.

Because our review is at law, the district court's findings are binding on us if such findings are supported by substantial evidence. Iowa R.App.P. 14(f)(1).

IV. Fair Value.

In an appraisal proceeding such as this, the district court's task is to determine the fair value of the dissenters' stock immediately before the merger. See Iowa Code §§ 490.1301(3), 490.1330(1); 490.1330(5)(a). Iowa Code section 490.1301(3) defines "fair value" 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."

Sieg believes that the district court blindly adopted the opinion of the Kellys' expert regarding the fair value of the Kellys' stock. Sieg thinks the court's determination of such value is not supported by substantial evidence. The Kellys on the other hand argue that substantial evidence does indeed exist for the court's fair value determination.

What we have here is the usual stand off inherent in stock valuation cases. Both parties believe their expert's stock valuation calculations are the "correct" ones.

We have consistently held that, in our review of such cases, we do not look for a predominant, perfect formula for arriving at fair value. No one factor governs the determination of fair value. See Woodward v. Quigley, 257 Iowa 1077, 1103, 133 N.W.2d 38, 53 (1965) ("[w]e recognize [real value] cannot be determined by any exact mathematical computation and no one formula or figure is binding or conclusive"); Robbins v. Beatty, 246 Iowa 80, 91, 67 N.W.2d 12, 18 (1954) ("It is unwise to attempt to state every factor that may bear on value of stock in a particular case.").

However, we have recognized three popular approaches to appraisal of dissenters' stock: market value, investment value, and net asset value. Richardson, 353 N.W.2d at 378. In Richardson we concluded that, in relying on these approaches to determine the fair value of dissenters' stock, trial courts should consider the approaches "as relevant factors rather than essential components." Id. This conclusion is based on the realities facing trial courts Courts, unlike...