Woodward v. Quigley

• Decision Date: 09 February 1965
• Docket Number: No. 1,No. 51390,A,No. 2,1,2,51390
• Citation: 133 N.W.2d 38,257 Iowa 1077
• Parties: F. W. WOODWARD, F. R. Woodward, M. Jeanne Woodward, and Elsie M. Woodward, F. Robert Woodward, M. Jeanne Woodward and American Trust & Savings Bank, Dubuque, Iowa, Trustees of Fred W. Woodward Trust, and Elsie M. Woodward, F. Robert Woodward, M. Jeanne Woodward and American Trust & Savings Bank, Dubuque, Iowa, Trustees of Fred W. Woodward Trustppellants, v. Margaret M. QUIGLEY, Appellee and Cross-Appellant.
• Court: Iowa Supreme Court

Page 38

133 N.W.2d 38

257 Iowa 1077

F. W. WOODWARD, F. R. Woodward, M. Jeanne Woodward, and Elsie M. Woodward, F. Robert Woodward, M. Jeanne Woodward and American Trust & Savings Bank, Dubuque, Iowa, Trustees of Fred W. Woodward Trust No. 1, and Elsie M. Woodward, F. Robert Woodward, M. Jeanne Woodward and American Trust & Savings Bank, Dubuque, Iowa, Trustees of Fred W. Woodward Trust No. 2, Appellants, v. Margaret M. QUIGLEY, Appellee and Cross-Appellant.

No. 51390.

Supreme Court of Iowa.

Feb. 9, 1965.

Rehearing Granted in Part May 4, 1965.

Clewell, Cooney & Fuerste, Dubuque, for appellants.

O'Connor, Thomas, McDermott & Wright, Dubuque, for appellee.

STUART, Justice.

The corporate life of the Telegraph-Herald, a newspaper in Dubuque, Iowa, was due to expire December 31, 1961. At a special stockholders' meeting on June 9, 1960, a resolution was duty adopted by a majority of all the stockholders extending the corporate existence perpetually. Of the 1200 shares of stock outstanding all voted in favor of the renewal except the 379 shares owned by defendant. Section 491.25. of the Code, I.C.A., provides in part:

'In all cases of renewal, those stockholders voting for such renewal must purchase at its real value the stock voted against such renewal, and shall have three years from the date such action for renewal was taken in which to purchase and pay for the stock voting against such renewal, which purchase price shall bear interest at the rate of five percent per annum from the date of such renewal action until paid.'

Plaintiffs recognize their obligation to purchase the stock under this statute, but the parties have been unable to agree on the 'real value' of defendant's stock. This action was brought by the majority stockholders to secure a court determination of its 'real value '. The trial court established a value of $1750 per share and both parties have appealed.

In Robbins v. Beatty, 246 Iowa 80, 91, 67 N.W.2d 12, 18, we define 'real value' as the 'intrinsic value, determined from a consideration of every relevant factor bearing on the question of value', including 'the rate of dividends paid, the security afforded that dividends will be regularly paid, possibility that dividends will be increased or diminished, the size of the accumulated surplus applicable to payment of dividends, record of the corporation, its prospects for the future, selling price of stock of like character, value of its assets, book values, market conditions, and reputation of the corporation. It is unwise to attempt to state every factor that may bear on value of stock in a particular case'.

I. The three standards that have received almost universal recognition in appraising the intrinsic value of stock under statutes of this type are (1) market value of the stock, (2) net asset value of the corporation, and (3) investment value. 13 Fletcher Cyclopedia Corporations, 335 § 5899 et seq. 'All relevant factors' referred to in the Robbins case can be considered under one or more of these three standards.

Market value of the stock, if it is possible to establish a value through sales on the open market, is a factor to be considered, but is not too dependable as a guide to intrinsic worth. The market price is subject to fluctuation for many reasons other than the intrinsic worth of the stock or the condition of the corporation. In this particular case, there is no evidence of any sales of stock upon the open market and admittedly no market value for stock in the Telegraph-Herald was established. This standard will not be considered here.

II. While most courts consider 'net asset value' in attempting to arrive at the real value of the stock, there are wide differences in the way it is defined and computed. Fletcher defines the term as 'the share which the stock represents in the value of the net assets of the corporation. It is a value based on a hypothetical dissolution and distribution of the corporate assets, and is one of the factors to be considered in an appraisal proceeding.' 13 Fletcher Cyclopedia Corporations, 338, § 5899.2 see also 55 Mich.L.R. 689, 692. The Delaware Supreme Court flatly states it has rejected the dissolution method of arriving at net value of corporate assets and requires them to be valued as a 'going concern'. Felder v. Anderson, Clayton & Co., Del.Ch., 159 A.2d 278. However, it does not appear from the facts of the cases that they have actually followed this practice. In the Felder case, the Delaware Court rejected the capitalized earnings method of valuing the assets for reasons which we consider sound, saying:

'The appraiser's approach seeems unacceptable to me because it uses an element of value (capitalized earnings) to determine the maximum value for another element (asset value). It seems clear that the fair value of assets at a given date are not necessarily fully reflected in capitalized earnings as of that date. * * * One might turn it around and say that the capiltalized earnings formula is unacceptable because it does not 'jibe' with the fair asset value. Could we say there was no asset value where the capitalized earnings figure was zero?' Felder v. Anderson, Clayton & Co., ibid, p. 282. The court then accepted the valuation of a witness who arrived at 'sound value' by computing the replacement cost and depreciating it. The court said 'sound value' was sufficiently close to 'actual value' to warrant its use. Depreciated replacement cost does not place the value of the assets on a 'going concern' basis.

The Delaware court in Sporberg v. City Specialty Stores, 35 Del.Ch. 560, 123 A.2d 121, 126, accepted a valuation of real estate which was based upon the capitalization of the estimated net rental income at 6%. This is not a valuation as part of a going concern (ladies' apparel and accessories) but a valuation of the property as rental property.

We are unable to perceive how a going concern valuation can avoid being influenced by the earnings. Capitalization of earnings which Delaware rejected seems to be the most widely recognized method of valuing assets of a going concern. Net asset value should not be influenced by earnings. We therefore prefer the Fletcher method of determining net asset value by valuing the assets as such. This offers protection to the minority stockholder in a corporation with a poor earnings record. In such instance the value as a going concern might be less than the dissolution value of the assets. It would not be fair to limit the minority interest to a value influenced by poor earnings, when the minority might prefer to liquidate and convert the assets into cash, and at the same time place the majority in a position where it could later liquidate and receive the entire benefit of the greater liquidation value. Net asset value will, in most instances, be of far less importance than the investment value of the stock, because the real value of the stock is still to be determined as in a going concern. However, net asset value as defined by Fletcher is a factor to be considered. The weight to be given this factor will depend upon the facts in each case.

We do not find the evidence here on the net asset value very satisfactory. Plaintiffs depend upon the evidence of Mr. McKean of the American Appraisal Company in which he expresses his opinion as to the 'real value' of the assets of the corporation. Even though there is a detailed appraisal of the physical assets, his testimony reveals that his real value was limited to the value of the earnings capitalized at 6%. He testified:

'My real value appraisal of the net assets of the Telegraph-Herald as of June 9, 1960 in the amount of $1,649,307, if divided by $99,000, my estimated future income, would yield a rate of return on tangible assets of about six per cent. Money costs are very close to six per cent. Therefore the Telegraph-Herald barely earns an adequate return on their tangible assets.'

It was brought out on cross examination that Mr. McKean's evaluation of the Telegraph-Herald building and lots was only $50,000 more than the valuation his assistant placed upon the lots as if they were vacant. Other vacant lots were valued by McKean at considerably less than the value placed upon them by his assistant. He justified the reduction by stating:

'In my opinion the real value of the assets of the Telegraph-Herald as of June 9, 1960 was $1,649,307. The earnings of the Telegraph-Herald do not support a higher valuation. Investors would not be attracted to this property at a higher purchase price because the earnings of the Telegraph-Herald would not give the desired return on their invested capital.'

Further proof that his valuation was based upon earnings is found in his evaluation of radio station KDTH. 'In my opinion the real value of the radio station as a going concern is in excess of the value of its separate assets. To reflect this opinion I evaluated the license and other intangibles of radio station KDTH in excess of $97,000.'

As his valuation of the net corporate assets was based upon, or at least limited to, a capitalization of earnings, we reject it as did the Delaware court for the reasons quoted above from their opinion in the Felder case.

Defendant offered a detailed appraisal of the real estate and personal property by Marshall and Stevens of Chicago. The appraiser arrived at the 'sound value' of the property by computing the replacement cost and deducting depreciation. A figure which was reached in this manner was approved in the Felder case, even though this method of evaluation was not approved. 'Sound value' is essentially an insurance concept. A large proportion of defendant's appraisers' experience was in appraising for insurance purposes.

We do not believe that such an evaluation of assets is helpful for our purpose here. Our 'real object is to ascertain the actual worth of that which the dissenter loses because of his unwillingness to go along with the controlling...