Utah Res. Int'l, Inc. v. Mark Techs. Corp.

• Decision Date: 23 December 2014
• Docket Number: No. 20120427.,20120427.
• Court: Utah Supreme Court
• Parties: UTAH RESOURCES INTERNATIONAL, INC., a Utah Corporation, Petitioner, Appellant, and Cross–Appellee, v. MARK TECHNOLOGIES CORPORATION and Kenneth G. Hansen, Respondent, Appellees, and Cross–Appellants.

776 Utah Adv. Rep. 11

UTAH RESOURCES INTERNATIONAL, INC., a Utah Corporation, Petitioner, Appellant, and Cross–Appellee,

v.MARK TECHNOLOGIES CORPORATION and Kenneth G. Hansen, Respondent, Appellees, and Cross–Appellants.

No. 20120427.

Supreme Court of Utah.

Dec. 23, 2014.

Vacated and remanded.

[342 P.3d 763]

John H. Bogart, Salt Lake City, Craig M. White, Chicago, IL, for appellant.

Bruce J. Boehm, Salt Lake City, for appellees.

Chief Justice DURRANT authored the opinion of the Court, in which Associate Chief Justice NEHRING, Justice DURHAM, Justice PARRISH, and Justice LEE joined.Chief Justice DURRANT, opinion of the Court:

Introduction

¶ 1 This case arises out of a decision by two minority shareholders of Utah Resources International, Inc. (URI) to dissent from the company's consummation of a share-consolidation transaction. Utah law provides that shareholders may dissent from certain corporate transactions and requires the corporation to pay the dissenting shareholders “fair value” for their shares. ¹ But here URI and the dissenters disagreed on the “fair value” of the dissenters' shares, which led to URI instituting a fair value proceeding in the district court. That court ultimately concluded that the fair value of the dissenters' shares was over two times the amount proposed by URI.

¶ 2 Before reaching the merits of this case, we first address whether URI waived its right to appeal given that it partially paid the judgment against it. We ultimately conclude that URI has not waived its right to appeal. URI has not satisfied the judgment against it in full and, regardless, it expressly reserved its right to appeal.

¶ 3 Turning to the merits, the primary question presented by URI is whether the district court erred in determining the fair value of the dissenters' shares. We conclude that the court did err in disallowing four deductions from URI's assets, namely, deductions for: (1) transaction costs associated with the anticipated sale of real estate, (2) trapped-in capital gains taxes related to the sale of real estate, (3) income taxes on oil and gas royalty interests, and (4) a discount on URI's minority interest in another company. In rejecting these deductions, the district court relied on inapplicable caselaw from other jurisdictions and misread our own caselaw. Accordingly, we vacate the district court's ruling and remand for proceedings consistent with this opinion. Because we vacate the district court's ruling on this basis, we do not address URI's additional claim that the court did not give adequate consideration to URI's market value or investment value. We also do not address the claims made by the dissenters in their cross appeal.²

4. URI notes that MTC and its owner, Mark Jones, filed six lawsuits against URI beginning in 1996. Among these suits was an attempt to block a sale of URI stock. In 1996, Mr. Jones attempted to obtain control of URI by buying shares held by the company's founder, John Morgan. Mr. Jones offered $3.00 per share. But he was outbid by John Fife, URI's president, who offered $3.35 per share. Mr. Jones tried to block the sale to Mr. Fife, but the case ultimately settled and the sale proceeded.

¶ 5 According to URI, most of its shareholders wanted to sell their stake in the company before it completed the winding-down process. From 2000 to 2004, several dozen shareholders sold their shares to URI's president, John Fife, at prices ranging from $1,000 to $4,000 per share. By 2004, URI had approximately thirty-five shareholders. Inter–Mountain Capital Corporation (IMCC) was the largest shareholder and held about eighty-seven percent of URI's outstanding shares.⁵

II. The 2004 Transaction

¶ 6 In late 2003, URI's board of directors wanted to provide the remaining shareholders added liquidity, so it investigated the possibility of conducting a share-consolidation transaction. The potential transaction consisted of two main steps. First, URI would effect a reverse-stock split through an amendment to its Articles of Incorporation. The company planned to reduce the number of outstanding shares on a 500 to 1 ratio. Each 500 shares of $100 par value stock would be converted into one share of $50,000 par value stock. Second, URI would buy out any fractional shareholders. The transaction would have the effect of buying out all of URI's shareholders except for Mr. Fife and his company, IMCC.

¶ 7 URI's board hired Jeff Wright of Centerpoint Advisors, Inc. to appraise the company and determine the fair value of its shares. Mr. Wright had performed a similar valuation for URI on previous occasions.⁶ He issued a fairness opinion, which offered URI's board several possible values for the company's shares, including a market value of $2,750 per share, an investment value of $4,908 per share, and a net asset value of $5,644 per share.⁷

¶ 8 URI's board unanimously voted in favor of the share-consolidation transaction on March 26, 2004, and its shareholders approved the transaction just over two months later. The company made the transaction effective on June 15, 2004.⁸ Based on Mr. Wright's fairness opinion, URI decided to repurchase fractional shares for $5,250 per share held before the reverse-stock split. Accordingly, URI tendered payment of $656,250 to MTC for its 125 shares, plus $5,214.04 in interest, and tendered payment of $162,750 to Mr. Hansen for his 31 shares, plus $2,184.86 in interest.

¶ 9 MTC and Mr. Hansen were the only shareholders to object to the share-consolidation transaction. They valued their shares in URI at $31,847 per share. They complained that the share consolidation was the culmination of several attempts by Mr. Fife to gain

[342 P.3d 765]

an “unpaid for majority position in URI” and “squeeze out” minority shareholders by purchasing their stock at undervalued prices. Ultimately, URI and the Dissenters were unable to reach an agreement regarding the value of the Dissenters' shares. Accordingly, URI timely petitioned the district court to determine the “fair value” of the shares.⁹

III. Fair Value Proceedings in the District Court

¶ 10 As noted above, on the valuation date, URI's primary business strategy was to hold real estate assets for sale. URI's vice president, Gerry Brown, testified that “everything [was] for sale.” He estimated that it would take approximately ten years to sell all of the company's property. This business strategy was not contingent on the consummation of the share-consolidation transaction.

¶ 11 URI points out that because of its business strategy “[t]here is accordingly no dispute that the vast majority of URI's value as of the valuation date, and its only realistic means of generating earnings, came from its assets.” URI's assets, as of the valuation date, can be divided into four general categories. First, URI held seventeen parcels (about 345 total acres) of undeveloped real estate in St. George, Utah. Second, it held a minority-membership interest in Hidden Hollows Associates, LLC (HHA), which is a closely held real estate company headquartered in Park City, Utah. Third, it owned oil and gas royalty rights. And fourth, it owned a variety of other miscellaneous assets, including cash and receivables.

¶ 12 One of URI's largest liabilities was trapped-in capital gains taxes on the St. George real estate. A trapped-in capital gains tax liability accounts for the fact that a company will incur a capital gains tax if it sells an appreciated asset.¹⁰

¶ 13 The district court received three appraisals of URI—two from the court-appointed appraiser, Roger Smith, and one from URI's testifying expert, Francis Burns. The core issues before us on appeal relate to these appraisals, and consequently we separately describe each appraisal in some detail below.

A. Mr. Smith's Appraisals

¶ 14 Mr. Smith's initial appraisal estimated the value of the Dissenters' shares using an asset-value approach.¹¹ That approach required him to separately appraise the value of each of URI's assets. In determining the value of URI's assets, Mr. Smith discounted the value of URI's interest in HHA, based on URI's status as a minority shareholder and the projected transaction costs in selling that interest.¹² He then deducted from the discounted asset value both booked and projected liabilities. These included deductions for (1) anticipated trapped-in capital gains taxes and transaction costs related to the sale of the St. George real estate,¹³ and (2) income

[342 P.3d 766]

taxes on URI's oil and gas royalty interests.¹⁴ In the end, Mr. Smith derived an asset value for URI of $17,769,073, or $7,571 per share. ¹⁵

¶ 15 Both parties contested Mr. Smith's initial valuation. URI objected to it as being “incomplete, insofar as it did not offer an Investment Value or Market Value for URI.” The district court overruled URI's objections. The Dissenters challenged, as a matter of law, Mr. Smith's use of certain asset discounts and projected liabilities deductions. Specifically, they challenged Mr. Smith's application of a discount to URI's interest in HHA on the basis that any marketability discount was contrary to Utah law. And they challenged Mr. Smith's use of tax and transaction costs deductions on the basis that any future land sales, and the accompanying taxes and costs, were “speculative” and that Utah law prohibited the district court from considering them. The district court sustained the Dissenters' objections and ordered Mr. Smith to produce a new appraisal without any marketability discounts or adjustments for built-in capital gains taxes. The district court's disallowance of these discounts and deductions is the first issue URI has raised on appeal.

¶ 16 Mr. Smith stated that he believed his initial appraisal represented the fair value of URI, but he agreed to amend his report, indicating that he and his fellow appraisers were “not attorneys and [were] not qualified to interpret Utah law.” His amended valuation resulted in the following...