Valuation of Common Stock of Libby, McNeill & Libby, In re

CourtSupreme Judicial Court of Maine (US)
Citation406 A.2d 54
Decision Date16 August 1979

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406 A.2d 54
Supreme Judicial Court of Maine.
Aug. 16, 1979.

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Verrill & Dana by John A. Mitchell (orally), Andrew P. Geoghegan, Andrew M. Horton, Portland, for petitioner.

Thompson, Willard & McNaboe by Bruce M. Tompkins (orally), Richardson, Hildreth, Tyler & Troubh by William K. Tyler, Peter H. Jacobs, Portland, for dissenting stockholders.


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McKUSICK, Chief Justice.

For the first time since the enactment of the Maine Business Corporation Act, effective on January 1, 1972, the courts are in this case called upon to construe and apply the dissenting shareholder appraisal provisions of the Act, 13-A M.R.S.A. § 909 (1974).

In this proceeding, the Superior Court (Cumberland County) had the task of determining the "fair value" as of February 17, 1976, of the common stock of Libby, McNeill & Libby (hereafter "Libby"), a former Maine corporation, engaging primarily in production of canned foods. Libby, McNeill & Libby, Inc. (hereafter "petitioner"), the Delaware successor by merger to the Maine corporation, sought this determination in order to establish the magnitude of its liability to former Libby shareholders who dissented from the merger authorized by all necessary votes on February 18, 1976. 1 The Superior Court valued the Libby stock at $8.55 per share. On appeal, petitioner maintains that the Superior Court justice should have accepted the recommendation of the court-appointed appraiser, who valued the stock at $6.00 per share. Petitioner also contends that the Superior Court erred in ordering petitioner to pay the shareholders' expert fees and expenses. The dissenting shareholders cross-appeal, claiming that the Superior Court's valuation of $8.55 per share is too low, and that the trial justice should have awarded them their attorneys' fees, as well as their experts' fees and expenses.

The major issue generated by this appeal is the proper definition of the term "fair value" as it is used in the dissenting shareholder provisions of the Maine Business Corporation Act. We hold that the Superior Court justice's interpretation of the term "fair value" was not entirely correct. On reviewing the record made before the appraiser, we conclude that the Superior Court should have accepted the appraiser's recommendation that a fair value of $6.00 per share be set for the Libby stock. Accordingly, we sustain petitioner's appeal and deny the shareholders' cross-appeal.

I. Facts of the Case

Pursuant to the procedure for a "short form merger" authorized by the Maine Business Corporation Act, 13-A M.R.S.A. § 904 (1974), 2 Libby was in early 1976 merged into a Delaware corporation, Universal Food Specialties (hereafter "UFS"), a wholly owned subsidiary of Nestle Alimentana S.A., a Swiss company (hereafter "Nestle").

The corporate relationship between Nestle and Libby dates from 1960. In that year Nestle and its affiliates began buying Libby shares. In 1963 Nestle increased its holdings to 9% of all outstanding common stock. By 1967 Nestle owned 36% of the Libby stock and had become Libby's principal shareholder.

Libby found itself in serious financial difficulty by 1969. Cash dividends had not been paid for eight years, and it suffered a net loss of $15.3 million in fiscal year 1969. Unable to raise needed capital through bank loans or securities sales, Libby turned to Nestle for help, and Nestle responded by providing Libby with a $10.5 million unsecured loan. Libby's economic misfortunes

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continued through 1970, and existing bank lines of credit were imperiled. Libby's banks requested that Nestle make additional capital available to Libby. Consequently, in October 1970 a subscription offer granted each Libby common shareholder the right to purchase additional shares on a one-for-one basis at $5.25 per share (a price then about 10% below the market price). By agreeing to subscribe pro rata to the newly issued stock and also to purchase any other shares not subscribed to by other shareholders, Nestle increased its Libby holdings to over 51%. Thereupon the banks agreed to extend credit to Libby so long as Nestle retained its position as Libby's majority shareholder.

By 1974 Nestle had increased its holdings to over 60%. Then, in 1975, Nestle decided to eliminate all minority shareholders and to turn Libby into a wholly owned subsidiary. Nestle transferred ownership of all its Libby shares to the wholly owned Nestle subsidiary UFS, and on May 29, 1975, UFS made public its tender offer to acquire all remaining shares of Libby common stock. By its tender offer UFS clearly appraised the public that if it received enough Libby stock to raise its holdings to more than 90%, UFS intended to effect a "short form merger" of Libby with UFS. UFS offered to pay $8.125 per share, a price 65% above the stock market price of $4.88 per share on the New York Stock Exchange at which Libby stock traded on May 23, 1975, the last day prior to announcement of the UFS tender offer. 3 More than three quarters of all available shares of Libby common stock were sold to UFS in response to its tender offer, thus giving UFS an aggregate holding of more than 90% of Libby common stock.

On February 18, 1976, petitioner's board of directors approved the plan for a short form merger of Libby and UFS pursuant to 13-A M.R.S.A. § 904. No shareholder vote or further corporate action by Libby was required for authorization of the merger under Maine law. See n. 2 above. Following refusal by both state and federal courts to enjoin the merger, Tanzer Economic Associates, Inc. Profit Sharing Plan v. Universal Food Specialties, Inc., 87 Misc.2d 167, 383 N.Y.S.2d 472 (Sup.Ct., March 10, 1976); Merrit v. Libby, McNeill & Libby, 533 F.2d 1310 (2d Cir., April 5, 1976), the merger was completed on April 6, 1976. From among those who had rejected the UFS offer of $8.125 per share, 110 shareholders owning 66,140 shares of Libby stock filed written demands for payment of the fair value of their shares and otherwise perfected their right to participate in this valuation proceeding. See 13-A M.R.S.A. § 909(3).

On May 7, 1976, petitioner commenced this Superior Court proceeding to determine the "fair value" of the Libby common stock as of February 17, 1976, "the day prior to the date on which the vote . . . of the directors . . . was taken approving the (merger), excluding any appreciation or

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depreciation of shares in anticipation of such corporate action." See 13-A M.R.S.A. § 909(1). Pursuant to 13-A M.R.S.A. § 909(9)(E), the Superior Court appointed to serve as appraiser a retired justice of the Supreme Judicial Court, with statutory authority "to receive evidence and recommend a decision on the question of fair value." Id. The appraiser held hearings for four days late in April 1977, receiving expert testimony on behalf of both petitioner and the dissenting shareholders. He submitted his report on December 21, 1977, which he supplemented on January 16, 1978.

The appraiser determined that three components should be considered in determining "fair value": stock market price, investment value, and net asset value. After assigning dollar-per-share values to those three components, the appraiser weighted the factors to reach a composite "fair value" per share. The Superior Court justice accepted the appraiser's recommended values for each of those three components. However, the justice rejected the relative weightings assigned by the appraiser to those components, and thus rejected the appraiser's recommendation for the per share value of the Libby stock. The table below sets forth the differing approaches and results of the appraiser and the Superior Court:

                 Components Appraiser Superior Court
                ------------------------------ ------------ ----------------
                Stock Market Price ( $4.88) 40% ($1.95) 10% ($0.49)
                Investment Value ( $2.52) 40% ($1.01) 45% ($1.12)
                Asset Value ($15.41) 20% ($3.08) 45% ($6.94)
                ------------------------------ ------------ ----------------
                Total ("Fair Value") $6.04 $8.55

Noting that expert opinions based on alternative valuation methods placed the value of the Libby stock in the range of $5.00 to $6.50 per share, the appraiser recommended that the Superior Court round off the "computation" of the composite value and find a fair value of $6.00 per share for the Libby common stock.

In assigning weights to the components of value, the appraiser and the Superior Court relied upon different conceptions of the meaning of "fair value." We now address ourselves to the issue of the proper definition of that statutory term.

II. The Judicial Determination of "Fair Value"

Nowhere does the Maine Business Corporation Act define the "fair value" which it in section 909(1) directs that dissenting shareholders should be paid. 4 Although the phrase "fair value" is also used in the comparable dissenting shareholder provision of the Model Business Corporations Act (section 81), the official comment to the Model Act sheds little light on the intended meaning of those words. That comment simply states: "The cases indicate that there is no definite rule for determining 'fair value' but that the proper result in each case will

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depend upon the particular circumstances of the corporation involved." Among other jurisdictions with valuation statutes similar to our own, 5 we do find, however, a consensus that the component elements to be relied upon in determining "fair value" are stock market price, investment value, and net asset value. 6

While it is generally agreed that the process of stock appraisal involves consideration of all three of those elements of value, "the weight to be given to these factors depend(s) upon the circumstances of each individual case. The courts have consistently declined to lay down hard and fast...

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