Southdown, Inc. v. McGinnis

Decision Date30 May 1973
Docket NumberNo. 6991,6991
PartiesSOUTHDOWN, INC., a Louisiana corporation, Appellant and Cross-Respondent, v. Clara L. McGINNIS et al., Respondents and Cross-Appellants.
CourtNevada Supreme Court

Foley Brothers, Las Vegas, Baker & Botts and Alvin M. Owsley, Jr., Houston, Tex., for appellant and cross-respondent.

Coleman & O'Connell, Los Angeles, Lionel Sawyer Collins & Wartman and McNamee, McNamee & Rittenhouse, Las Vegas, for respondents and cross-appellants.


THOMPSON, Chief Justice.

Clara L. McGinnis, et al., the dissident stockholders of C. Leonardt Improvement Company (CLI) who hold 581 common shares of the stock of that company, filed a petition with the district court to have appraisers appointed to determine the fair cash value of each share of stock owned and held by them in CLI. 1 Three appraisers were appointed, and an appraisal report was filed with the court which it confirmed. It was the opinion of the appraisers that the fair cash value of each $100 par value common share of CLI, as of November 18, 1970, was $12,650 and that the fair cash value of the 581 common shares owned by Clara L. McGinnis, et al. on that date was therefore, $7,349,650. Judgment was entered accordingly. Pre-judgment interest was denied. Southdown, Inc., has appealed, challenging the court's confirmation of the valuation of the appraisers. Clara L. McGinnis, et al. have cross-appealed contending that the district court committed error in denying pre-judgment interest.

Southdown, Inc., the appellant and cross-respondent, is the successor corporation to CLI by reason of two corporate mergers. Southdown is a publicly held Louisiana corporation based in Houston, Texas. By February of 1970 it had acquired control of CLI and two of CLI's closely held subsidiary companies, Southwestern Cement Associates (SWCA) and Southwestern Portland Cement Company (SWPCC). 2

In November 1970, Southdown incorporated 1034 Wilshire Corporation, a Nevada corporation, with an authorized capital of 1000 outstanding shares of common stock. It was proposed that the 1034 Wilshire Corporation be merged into CLI through an exchange of common stock. This merger was effected on November 19, 1970. Thereafter, on December 4, 1970, CLI was merged into Southdown.

The proposed exchange of common stock between 1034 Wilshire Corporation and CLI was refused by Clara L. McGinnis, et al. representing 581 common shares on the ground that it was not a fair offer for their stockholdings in CLI. On January 9, 1971, Southdown offered McGinnis, et al. $7,725 per share for the 581 common shares, which offer was refused, and this proceeding ensued.

On the day prior to the merger of 1034 Wilshire into CLI, that is, on November 18, 1970, Southdown owned 1530 common shares of CLI or 58.84 percent of the total, McGinnis, et al. owned 581 shares or 22.34 percent of the total, and others owned 489 shares or 18.82 percent of the total. The court instructed the appraisers to value the CLI stock as of that date. That date was selected in order to avoid any element of value arising from expectation of the merger. NRS 78.505.

The court's instructions to the appraisers, approved by counsel for the respective parties, advised that (a) fair cash value is the amount of money at which property (shares of capital stock) would most probably exchange between a buyer, willing to buy, and a seller, willing to sell, both buyer and seller being fully knowledgeable about the enterprise but under no compulsion to buy or sell, and both buyer and seller contemplating the retention of all facilities involved at their present locations for a continuation as a part of the existing business enterprise (b) the basic concept of the appraisal is that the dissenting stockholders are to be paid for that which has been taken from them, that is, their proportionate interest in a going concern and (c) the appraisers were to consider and weigh as they deem fit in their expert opinion, all factors which bear upon fair cash value as defined by the court.

The appraisers utilized the three commonly recognized approaches for developing fair cash value, the market, cost, and income methods. The market approach produces an estimate of value of property by comparing it with similar properties of the same character which have been sold recently or are currently offered for sale in the same or competing areas. The cost approach develops the cost to acquire in like kind or replacement in like utility the property of replaceable character discounted for all factors that affect value, as physical deterioration, functional and economic obsolescence, and to which is added the value of the land. The income approach concerns itself with the present worth of the future benefits of a property. This is generally measured by net income which is capitalized to an estimate of value.

The appraisers' task was a large one. As already indicated, CLI's principal assets included investment in marketable securities, two closely held subsidiary companies (SWCA and SWPCC), and real estate consisting of a shopping center in Sunnyvale, California. Except for the shopping center rental income, most of its income was derived from dividends.

Southwestern Cement Associates (SWCA) owned no real estate or any other assets except for its investment in Southwestern Portland Cement Company. Its income was derived from dividends from that investment.

Southwestern Portland Cement Company is a closely held West Virginia corporation, owning quarries and manufacturing facilities in California, Ohio and Texas for the production and marketing of cement. SWPCC also owned two subsidiary companies--Vortec Products Company, a California corporation which manufactures particle classifying equipment, and Mojave Northern Railroad Company, a corporate private carrier owning a certain right of way. SWPCC also owns a 25 percent interest in Black River Mining Company joint venture, a limestone mining operation.

All of these major properties were inspected by the appraisers and all relevant data secured.

Southdown's objections to the court confirmation of the appraisal report are three. First, it complains that the report did not assign specific weights to the three elements of valuation, that is, the market cost and income elements or approaches to value. We summarily reject this complaint. One of the proposed instructions submitted to the court would have required the appraisers to weight each element. That instruction was rejected and changed to read that the appraisers 'shall detail the factors considered and the reasoning leading to the conclusion of valuation.' This change was approved by both parties.

Second, Southdown asserts that the appraisal report is unreliable since it failed to consider and give weight to the consequence of the termination of dividend payments on the common stock of CLI, SWCA, and SWPCC.

Third, Southdown contends that the appraisal report is unreliable since it failed to consider and give effect to the market price of the stock of CLI, SWCA and SWPCC. We turn to consider the second and third contentions in the light of the relevant facts appearing from the record before us.

1. Certain preliminary observations may be useful. When reviewing court confirmation of an appraisal report, the findings of the appraisers are not to be disturbed unless clearly wrong. Application of Delaware Racing Association, 213 A.2d 203, 207 (Del.1965); Jeffrey v. American Screw Company, 201 A.2d 146, 152 (R.I.1964); American General Corporation v. Camp, 171 Md. 629, 190 A. 225, 230 (1937). This standard is not dissimilar to that governing an ordinary trial before a court where we are not to set aside the findings made unless they are clearly erroneous. NRCP 52(a).

The words 'fair cash value' as used in NRS 78.510 have been construed by courts elsewhere to mean the intrinsic value of the dissenting shareholder's interest determined from the assets and liabilities of the corporation considered in the light of every factor bearing on value. Roessler v. Security Savings & Loan Co., 147 Ohio St. 480, 72 N.E.2d 259, 260 (1947); Lucas v. Pembroke Water Co., 205 Va. 84, 135 S.E.2d 147, 150 (1964); Porter v. C. O. Porter Machinery Co., 336 Mich. 437, 58 N.W.2d 135, 136 (1953); Adams v. United States Distributing Corporation, 184 Va. 134, 34 S.E.2d 244, 250 (1945). We so construe NRS 78.510. The instructions of the court herebefore mentioned appear to have had this general concept in mind.

a) Southdown asks that we reject the appraisal report as unreliable since it failed to consider and give weight to the consequence of the termination of dividend payments on the common stock of CLI, SWCA and SWPCC.

In March of 1970, Southdown assumed the direction and control of those companies, and elected no longer to pay regular dividends on the common stock thereof. It is Southdown's position that such decision was the responsibility of the directors; that shareholders do not have a vested right to receive dividends. Perhaps this is true. Southwestern Portland Cement Co. v. Latta & Happer, 193 S.W. 1115 (Tex.Civ.App.1917). It does not inevitably follow, however, as Southdown contends, that the failure to pay dividends on common stock reflects a diminished value of that stock. Low dividends, or even the absence of dividends, are not necessarily a sign of financial weakness. Perhaps the directors preferred to retain earnings in the business for the purpose of expansion, or for a variety of other reasons, rather than to pay dividends. Funds paid out in dividends are not available for corporate growth. On the other hand, continued corporate earnings without the payment of dividends would increase the equity value of the stock. Thus, it would seem that the capacity of the company to pay dividends would carry greater weight in valuing the shareholder's interest than would consideration of...

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