Steiner Corp. v. Benninghoff
| Citation | 5 F.Supp.2d 1117 |
| Decision Date | 26 May 1998 |
| Docket Number | No. CV-N-94-0840-ECR.,CV-N-94-0840-ECR. |
| Parties | STEINER CORPORATION, a Nevada corporation, Petitioner, v. Bertha C. BENNINGHOFF, as Trustee of the Bertha C. Benninghoff Trust Dated January 6, 1993, Patricia A. Benninghoff, George R. Benninghoff, Joshua W. Benninghoff, Chapin J. Benninghoff, Ted. J. Benninghoff, and Virginia D. Benninghoff, Respondents. |
| Court | U.S. District Court — District of Nevada |
Peter W. Billings, Jr., John E.S. Robson, P. Bruce Badger, of Fabian & Clendenin, Salt Lake City, UT, and Douglas A. Emerick, Beesley & Peck, Ltd., Reno, NV, for Petitioner.
Scott A. Glogovac, Reno, NV, for Respondents.
This matter was tried to the Court in a thirteen-day trial. At the close of trial, it was taken under consideration by the Court for decision. The following are our conclusions of fact and law, which dispose of all pending issues in this case.
Petitioner Steiner Corporation ("Steiner") originally filed this action on October 28, 1994, in the Second Judicial District Court in and for the County of Washoe, State of Nevada. Respondents (collectively, "the Benninghoffs") removed the case to this Court on November 28, 1994, based on diversity jurisdiction, and pursuant to 28 U.S.C. §§ 1332 and 1441.
Steiner seeks a judicial determination, pursuant to Nev.Rev.Stat. § 78.501,1 of the "fair value" of Steiner's common stock as of July 26, 1994. On that date, Steiner merged with Steiner Holding Corp., and bought out all minority shareholders at a price of $1200 per share except for the respondents, who had dissented from the vote in favor of the merger and elected dissenters' rights under N.R.S. § 78.476. As dissenters, respondents are entitled to receive the "fair value" of their shares, which Steiner contends is no more than $840 per share. The Benninghoffs, on the other hand, contend that the fair value of their shares is at least $1950 per share. As required by statute, Steiner paid each of the Benninghoffs its estimate (i.e., $840) of the fair value of his or her shares prior to filing for judicial determination of the fair value of those shares. Thus we must determine whether the true fair value of the shares exceeds $840 per share; if it does, then Steiner must pay the difference in price to the Benninghoffs, as well as interest on that amount pursuant to N.R.S. § 78.477.
In addition to the underlying dispute over valuation of the stock, both sides are claiming that the other acted "arbitrarily, vexatiously, and not in good faith," which, under N.R.S. § 78.502, would allow the prevailing party to collect attorney's fees from the party acting in bad faith.
Steiner, a privately owned company which at the time of the merger was already more than one hundred years old, has always been engaged primarily in the linen supply and textile rental businesses. At the time of the merger, Steiner also had subsidiaries engaged in private label food canning and textile filter manufacturing. Steiner is organized under Nevada law, with its headquarters in Salt Lake City, Utah, but also has a substantial overseas presence. At the time of the merger, roughly half (52.3%) of Steiner's linen/textile revenues came from outside the United States, which amounted to 38% of Steiner's total revenues. The bulk of Steiner's foreign operations was located in four countries: Australia, Brazil, Canada, and Germany.
Prior to the merger, there were 367,351 outstanding shares of Steiner common stock. Over 93% of the outstanding shares of common stock was owned by members of the Steiner family — descendants of the company's founder, George A. Steiner — either directly or through a trust. In addition, members of the family filled most of the important positions in company management, and made up a majority of the board of directors.
Steiner has always been a privately held company; its shares have never been publicly traded. However, early in the company's history, employees of the company were permitted to acquire its stock. Thus most of the minority shareholders in 1994, including the Benninghoffs, were descendants of original Steiner employees. The Benninghoffs are descendants of one George Benninghoff, who acquired his stock around the year 1900, and who apparently worked for Steiner for over fifty years. By 1994, this stock had been passed down, in intergenerational transfers, to the respondents, as well as to other members of the Benninghoff family not involved in this case. The respondents owned the following number of shares at the time of the merger: Bertha C. Benninghoff, as Trustee of the Bertha C. Benninghoff Trust dated January 6, 1993 — 2,859 shares; George R. Benninghoff — 180 shares; George R. and Patricia A. Benninghoff — 465 shares; Joshua W. Benninghoff — 34 shares; Chapin J. Benninghoff — 34 shares; Ted J. Benninghoff — 180 shares; Ted J. and Virginia D. Benninghoff — 540 shares.
In 1993, after several years of facing a potential accumulated earnings tax, Steiner decided to pursue the cash-out merger transaction. An accumulated earnings tax may be imposed, under I.R.C. § 531, when a company, "for the purpose of avoiding the income tax with respect to its shareholders ... permit[s] earnings and profits to accumulate instead of being divided or distributed." I.R.C. § 532(a). That is, the tax may be imposed when a company chooses not to make distributions to its shareholders because its shareholders (or at least its controlling shareholders) prefer not to receive dividends — and consequently be liable for income tax on those dividends — at a given time. Instead, they would rather let the value of the stock appreciate and either pass that gain on to their heirs with a stepped up basis at death, or sell the stock and pay tax at the capital gains rate rather than the higher personal income tax rate applicable to dividends. To the extent that such earnings are retained to provide for the "reasonable needs of the business," however, no accumulated earnings tax will be imposed.
Steiner appears to have been genuinely concerned that it was accumulating earnings in excess of what it needed to provide for its reasonable business needs — or at least that the IRS would see it that way. Of course, if Steiner had been willing to make a distribution to its shareholders, that would have taken care of the problem. However, for various reasons — which may or may not have been convincing to the IRS had it ever actually sought to impose an accumulated earnings tax — Steiner has historically been reluctant to issue dividends to its shareholders. It is not necessary for us to draw any conclusions about whether an accumulated earnings tax should have been imposed on Steiner. We merely note that the possibility of such a tax being imposed did exist, and that concern with such a possibility was the motivating force behind Steiner management's decision to pursue the merger transaction with Steiner Holding Corp.
As part of the overall transaction, Steiner planned to use some of its accumulated cash to buy out the shares of all minority shareholders — that is, all shareholders not members of, or controlled by members of, the Steiner family. Since the Steiner family already controlled a clear majority of Steiner's shares, the cash-out merger could have been approved without the consent of any of the minority shareholders. However, Steiner management decided to condition the merger on approval of a majority of the minority shareholders.
Steiner originally advised the minority shareholders of the potential merger and accompanying cash-out offer by letter in June of 1994. More than 82.5% of the minority shareholders voted in favor of the merger, including some members of the Benninghoff family. Only one non-Benninghoff shareholder voted against the merger. Even this shareholder tendered his shares for redemption at $1200 per share, however, leaving respondents as the only shareholders to elect dissenters' rights. In addition to the minority shareholders who tendered their shares, nine members of the Steiner family also tendered shares at the $1200 per share offer.
In determining what price to offer, the Steiner family hired the valuation firm of Houlihan, Lokey, Howard, and Zukin ("HLHZ"), which determined the per share price of Steiner stock to be $1418. The HLHZ study was not released to the board; instead, the Steiner family proposed that minority shares be re-purchased at the rate of $975 per share. However, the board of directors appointed a Special Committee, composed of the two outside members of the board, James Gardner and Victor Lund, to represent the interests of the minority. The Special Committee, in turn, retained independent legal counsel, and hired J.P. Morgan Securities, Inc. ("J.P. Morgan" or "JPM") to perform a valuation of the company and its stock. J.P. Morgan performed a valuation study of Steiner in February and March of 1994, which resulted in a value range of $1100-$1500 per share. Upon receiving the results of JPM's study, the Special Committee informed members of the Steiner family that the value of the stock fell within a range of $1100-$1400 per share. The only explanation for the reduction in the high end price was that both Gardner and Lund felt the high end of the range given by JPM was "too high," although neither man gave a very satisfactory explanation of why he felt this way. After some rather brief negotiations, the Steiners and the Special Committee agreed on the $1200 per share price.
Upon receiving notice of the vote regarding the proposed merger, the respondents attempted to obtain more information from Steiner about how the $1200 price had been set. While some of their requests for information were granted, others were not. Given the fact that there was less than a month between notice of the vote being sent out and the vote...
To continue reading
Request your trial
-
In re Young Broadcasting Inc.
...found discount cash flow ("DCF") to be the most commonly-used and accepted method of valuing an enterprise. Steiner Corp. v. Benninghoff, 5 F.Supp.2d 1117, 1129 (D.Nev.1998) (DCF is "in theory the single best technique to estimate the value of an economic asset") (quoting Cede & Co. v. Tech......
-
Pueblo Bancorporation v. Lindoe, Inc.
...discounted for marketability, as one factor to consider in determining the "fair value" of a dissenter's shares. Steiner Corp. v. Benninghoff, 5 F.Supp.2d 1117 (D.Nev.1998). However, the court ultimately allotted no weight to that factor and it did not affect its determination of fair value......
-
In re Young Broadcasting Inc., Case No. 09-10645 (AJG). (Jointly Administered) (Bankr. S.D.N.Y. 4/19/2010), Case No. 09-10645 (AJG). (Jointly Administered).
...discount cash flow ("DCF") to be the most commonly-used and accepted method of valuing an enterprise. Steiner Corp. v. Benninghoff, 5 F. Supp. 2d 1117, 1129 (D. Nev. 1998) (DCF is "in theory the single best technique to estimate the value of an economic asset") (quoting Cede & Co. v. Techni......
-
Utah Res. Int'l, Inc. v. Mark Techs. Corp.
...And as of the valuation date, URI had nonindividual shareholders, including one of the Dissenters, MTC.80 See Steiner Corp. v. Benninghoff, 5 F.Supp.2d 1117, 1129 (D.Nev.1998) (describing the discounted cash flow method as “generally accepted by courts faced with valuation cases”); Cede & C......
-
"Fair value" as an avoidable rule of corporate law: minority discounts in conflict transactions.
...Corp. v. Cutchall, 511 NE Rejects minority discount N.W.2d 519 (Neb. 1994). Steiner Corp. v. Benninghoff, NV Rejects explicit minority 5 F. Supp. 2d 1117 (D. Nev. discount; rejects control 1998). premium; applies implicit discount by using market value; applies 25% marketability discount La......