Weigel Broadcasting Co. v. Smith

                                             Fourth Division     
                                             July 24, 1997       
                              
                                             








No. 1-95-1626

WEIGEL BROADCASTING COMPANY, an Illinois)    APPEAL FROM THE
Corporation,                            )    CIRCUIT COURT OF
                                        )    COOK COUNTY.
  Plaintiff-Appellee/Cross-Appellant,   )
                                        )
     v.                                 )
                                        )
LLOYD C. SMITH and DARLENE V. SMITH,    )
DINO LEVENTIS; ROBERT J. BLESIUS and    )
GEORGE UKROPEN and ANITA UKROPEN;       )
DANIEL J. MCCARTHY III and SALLY C.     )
MCCARTHY; JOHN B. VAN DUZER, As Trustee )
of the John B. Van Duzer Trust; MALCOLM )
P. CHESTER and JACOB H. MARTIN, As      )
Independent Administrators of the       )
Estate of Charles G. Chester; JAMES M.  )
WILSON; THE CHICAGO CORPORATION; DAVID  )
R. DENIS; DONALDSON, LUFKIN & JENRETTE  )
SECURITIES CORPORATION; JON JOHNSEN     )
and NAOMI E. JOHNSEN; JON JOHNSEN; MYERS)
PUBLISHING CO.; WILLIAM D. BURKE;       )
STIFFEL NICOLAUS & COMPANY; EDWARD J.   )
SYLVESTER and MARGARET SYLVESTER,       )
                                        )
  Defendants                            )
                                        )
and                                     )
                                        )
LLOYD C. SMITH and DARLENE V. SMITH;    )
DINO LEVENTIS; ROBERT J. BLESIUS and    )
GEORGE UKROPEN; GEORGE UKROPEN and ANITA)
UKROPEN; JOHN B. VAN DUZER, As Trustee  )
of the John B. Van Duzer Trust; JAMES M.)
WILSON; THE CHICAGO CORPORATION; DAVID  )
R. DENIS; DONALDSON, LUFKIN & JENRETTE  )
SECURITIES CORPORATION; JON JOHNSEN and )
NAOMI E. JOHNSEN; and JON JOHNSEN,      )    HONORABLE
                                        )    EVERETTE A. BRADEN,
  Defendants-Appellants/Cross-Appellees.)    JUDGE PRESIDING.

          MODIFIED ON DENIAL OF PETITION FOR REHEARING

     JUSTICE WOLFSON delivered the opinion of the court:

     The minority shareholders in this case had no choice: they
had to sell their shares to the majority.  This dispute concerns
the value of the minority shares.  To resolve the issue, we have
to determine the meaning of the words "fair value" in the
Business Corporation Act.
     On January 5, 1988, Weigel Broadcasting Co. (Weigel)
petitioned the court to determine the "fair value" of its common
stock, in accord with section 11.70 of the Business Corporation
Act (805 ILCS 5/11.70 (West 1992)), after a number of minority
shareholders dissented from the company's plan to buy them out in
a reverse stock split.  The trial court valued the stock at $126
per share and awarded 7% prejudgment interest.  Some of the
dissenting minority shareholders have appealed, arguing that the
trial court valued the stock too low.  They also ask for
prejudgment interest at the rate of 9.59%.
     Weigel cross-appeals the prejudgment interest awarded,
arguing for a 5% statutory rate.
     We affirm the trial court's valuation of the shares and
determination of the applicable interest rate, although we modify
the trial court's view of how long interest should run.
BACKGROUND
     In 1987, Weigel was a company engaged in the business of
commercial television broadcasting.  Incorporated in Illinois
with its principal business office in Chicago, Weigel operated
two television stations, WCIU-TV Channel 26 in Chicago and W55AS
Channel 55 in Milwaukee, Wisconsin.
     On November 16, 1987, Weigel's Board of Directors sent its
shareholders a notice informing them that the Board was proposing
a "reverse stock split."  According to the proposal, 1,750 shares
of "old" Weigel stock would be redeemable for one share of "new"
Weigel stock.  Anyone holding less that 1,750 shares would turn
in their shares for cash.   No fractional shares would be
allowed.
     At the time of the proposed reverse stock split, Weigel had
88,167 outstanding shares of "old" common stock.  Howard Shapiro,
then-President of Weigel, and certain members of his family were
the beneficial owners of approximately 83% of these outstanding
shares.  The remaining 17% of the "old" shares were owned by 143
shareholders.
     In an Information Statement sent to the minority
shareholders it was explained that the reverse stock split would
have the effect of eliminating all of the minority shareholders
and would make Shapiro and his family members the owners of all
of the outstanding "new" shares of the company.  The purpose for
the proposed action was two-fold: to reduce the number of
shareholders so that the corporation could qualify for Sub-
Chapter S status and to eliminate the administrative expense and
delay associated with notifying minority shareholders of all
corporate actions when the minority shareholders, even
collectively, were unable to control or direct the corporation's
business affairs.
     Due to the conflict of interest between the controlling
shareholders and the minority shareholders, the Board of
Directors hired an independent valuation consulting firm, Valtec,
to determine the fair value of Weigel stock.  Based on Valtec's
valuation, Weigel offered $115 per "old" share of stock as the
cash buy-out price.
     Weigel's Board of Directors resolved, as provided for in
section 11.65(a)(4) of the Business Corporation Act of 1983
(BCA)(805 ILCS 5/11.65(a)(4) (West 1992)), that its shareholders
could dissent and obtain payment for their shares in accord with
section 11.70 of the BCA.  In an Information Statement dated
November 23, 1987, the minority shareholders were informed of
their right to dissent from the estimated fair value that Weigel
had determined.
       The Board of Directors reserved the right not to proceed
with the reverse stock split if enough minority shareholders
declined to accept the per-share offer.  After receiving the
Notice and Information Statement, 125 of the 143 minority
shareholders opted to accept the $115 per share cash buy-out
price.  Because a high number of shareholders accepted the per
share offer, Weigel effected the reverse stock split on December
31, 1987.  
     On January 5, 1988, Weigel filed a petition in the circuit
court of Cook County, pursuant to section 11.70(f) of the Act,
asking the court to determine and declare the fair value of
Weigel's common shares of stock for the remaining minority
shareholders who chose to exercise their dissenter's rights.
     At a hearing on the petition, Weigel presented the testimony
of its expert, John McCluskey, who valued the stock using a
discounted cash flow method and a market approach.  In
McCluskey's opinion, all factors bearing on the value of the
stock, including illiquidity (the fact that there was no open
market for the shares) and minority (the fact that the blocks of
shares held by the dissenters were small and did not represent
controlling interest over the company), had to be considered when
determining fair value.  Since there was no plan to liquidate the
corporation, and since there had never been any payment of
dividends on the common shares and there was no expectation that
dividends would be paid in the future, McCluskey opined that
Weigel's per share offer of $115 was a fair value for the stock
held by the minority dissenters.  This figure represented the net
asset value of the shares, to which a 50% discount had been
applied due to the illiquidity and minority of the shares.
     The dissenting minority shareholders also presented an
expert, Thomas Buono.  Buono, using three different models,
determined the value of the Weigel corporation.  He then
contended that the fair value of the shares was a simple pro rata
division of the corporate assets, without any discounts.  Buono
valued the shares at $578.41.  Discounts for minority and
illiquidity of the shares, he said, were inappropriate.
     After hearing all of the evidence, the court specifically
stated that it considered a number of factors in evaluating the
Weigel stock, including the nature and history of the business,
its general economic outlook and the economic outlook for the
specific industry, the book value of the stock, the business's
financial condition and earning capacity and dividend paying
history, as well as recent sales of stock.  The court went on to
state that "the testimony of Mr. McCluskey has a more credible
and relevant impact on these factors as compared to the testimony
of Mr. Buono."  The court then found the fair value of the stock
to be $126 per share and awarded 7% prejudgment interest.
DECISION
     The Stock Valuation
     The primary issue before this court is whether the trial
court's award of $126 per share and 7% interest provided the
dissenting stockholders with a "fair value" for their stock.
     The main thrust of the dissenting shareholders' position is
that "fair value" does not equal "fair market value."  Fair
value, the dissenters say, is "a proportional share of the
corporation as a going concern" or "a pro rata share" of the
corporation and all its assets without any discount for
illiquidity or minority.  Market value, however, as the name
implies, involves the marketability of the shares or the value
that the shares would command on an open market in an arm's
length transaction between a willing buyer and a willing seller. 
Marketability, but not fair value, they say, takes into
consideration such factors as illiquidity and minority.  
     Because the trial court discounted the value of their shares
due to their illiquidity and minority, the dissenters say, the
trial court equated fair value with market value.  In this way
the trial court erred as a matter of law and this court should
review the valuation de novo.
      Weigel disagrees and asks this court to uphold the trial
court's fair value determination because it is not against the
manifest weight of the evidence.  We agree that the proper test
is whether the trial court's conclusions were against the
manifest weight of the evidence.  Stanton v. Republic Bank of
South Chicago, 144 Ill. 2d 472, 479, 581 N.E.2d 678 (1991).
     The first matter to resolve is how to determine "fair value"
within the context of the Business Corporation Act.  
     Section 11.70(f) of the BCA provides, in pertinent part:
     "If, within 60 days from the delivery to the
     corporation of the shareholder notification of estimate
     of fair value of the shares and interest due, the
     corporation and dissenting shareholder have not agreed
     in writing upon the fair value of the shares and
     interest due, the corporation shall either pay the
     difference in value demanded by the shareholder, with
     interest, or file a petition in the circuit court of
     the county in which either the registered office or the
     principal office of the corporation is located,
     requesting the court to determine the fair value of the
     shares and interest due..."
     There is no statutory definition of "fair value."  Section
11.70(j) of the BCA states only that fair value "means the value
of the shares immediately before the consummation of the
corporate action to which the dissenter objects excluding any
appreciation or depreciation in anticipation of the corporate
action, unless exclusion would be inequitable."
     Courts have held that there is no "precise method" for
valuing the stock of a closely-held corporation, but that all
"relevant factors" may be considered.  Kalabogias v. Georgou, 254
Ill. App. 3d 740, 748, 627 N.E.2d 51 (1993).  A relevant factor
can be anything that might impact on the stock's intrinsic value. 
Independence Tube Corp. v. Levine, 179 Ill. App. 3d 911, 917, 535 N.E.2d 927 (1988).  A list of factors that may be relevant to the
determination of fair value of stock includes: earning capacity,
investment value, history and nature of the business, economic
outlook, book value, dividend paying capacity, and market price
of stock of similar businesses.  Stanton v. Republic Bank of
South Chicago, 144 Ill. 2d 472, 479, 581 N.E.2d 678 (1991).  It
is for the trial court to decide what weight to give the various
factors.  Its decision, made after careful consideration of all
the evidence presented, should not be overturned unless it is
against the manifest weight of the evidence.  Kalabogias v.
Georgou, 254 Ill. App. 3d at 749; Institutional Equipment &
Interiors, Inc. v. Hughes, 204 Ill. App. 3d 922, 931, 562 N.E.2d 662 (1990).
     The fact that the statute requires dissenting shareholders
to be given "fair value," without specifically defining the term,
we think, evidences a legislative intent to allow courts the
freedom to fashion a remedy without limiting them to any single
form of valuation.  It is a legislative grant of broad
discretion.
     If "fair value" meant only "fair market value" and there was
no market for the stock, would the stock have no value?  Clearly,
this would not be the case.  Therefore, courts must have the
ability to consider many factors when determining the value to be
placed on stock.
     The statutory directive, therefore, is in complete accord
with the case law which provides that no single methodology of
determining "fair value" should be operative.  Determining "fair
value" is not "an exact science, but involves many subjective and
complex determinations."  Stewart v. D.J. Stewart & Co., 37 Ill.
App. 3d 848, 855, 346 N.E.2d 475 (1976).
     Having determined that there is no precise method for
determining "fair value," we now consider whether the trial court
erred in its determination of "fair value" in this case.
     The court stated in Laserage Technology Corp. v. Laserage
Laboratories, Inc., 972 F.2d 799 (7th Cir. 1992), "Illinois
courts have made clear that the two terms ["fair value" and "fair
market value] are not necessarily synonymous." (Emphasis added.) 
But none of the cases suggests that fair value can never be
equated to fair market value.  The market value of stock is one
of the factors that may be considered by the court when making
its valuation.   In fact, in Independence Tube Corporation v.
Levine, 179 Ill. App. 3d 911, 917, 535 N.E.2d 927 (1988), the
court noted that market value is one of three recommended methods
of determining fair value.
       A review of the record in the present case does not
indicate that the trial court improperly construed the term "fair
value."  The trial court specifically stated in its judgment that
it considered several factors when valuing the Weigel stock.  It
enumerated certain factors it considered, including the nature
and history of the business, the economic outlook of the industry
and, in general, the book value of the stock, the company's
financial condition and earning capacity, as well as its dividend
paying capacity, good will, previous sales of stock, and market
price of stocks of similar corporations.  If the court in
determining "fair value" gave greater weight to the stock's
market value, it does not mean that other factors were not taken
into account.  See Institutional Equipment & Interiors, Inc. v.
Hughes, 204 Ill. App. 3d 922, 562 N.E.2d 662 (1990).
     There is a question, however, whether the trial court erred
in discounting the fair value of the shares based on illiquidity
and minority.  In Independence Tube, the court noted that the
propriety of using discounts when determining "fair value" in the
context of the BCA had not, until that time, been addressed by
any court.  After a review of authorities in other jurisdictions,
the court decided that "it may be appropriate for a trial court
to consider a minority interest factor or a lack of marketability
factor."  Independence Tube, 179 Ill. App. 3d at 917.
     Applying such discounts, therefore, is left to the trial
court's discretion.  See also Stanton v. Republic Bank of South
Chicago, 144 Ill. 2d 472, 479, 581, N.E.2d 678 (1991)( trial
court acted within its discretion when it applied minority and
illiquidity  discounts).  The question is whether the trial court
abused its discretion by applying these discounts under the facts
of this case.
     The dissenters point out that in both cases where discounts
were applied, Independence Tube and Stanton, the dissenting
stockholders were under no compulsion to relinquish their shares. 
In this case, the dissenters had no choice.
     In Independence Tube, in an effort to reduce the number of
shareholders so that Subchapter S status could be achieved, the
company proposed an amendment to its Articles of Incorporation
which would make Class A and Class B shares equal in economic
respects.  At the same time the company offered to purchase all
Class A shares for $500 and Class B shares for $25.  Levine, as
trustee for 500 Class A shares of stock, dissented from the
proposed amendment and demanded payment for the value of these
shares.  Later, the proposed amendment was passed and
Independence purchased 8,925 Class A shares and 31,400 Class B
shares.  Levine notified Independence that he believed the shares
were worth $774.51 per share and demanded the additional value. 
A petition then was filed for the court's valuation of the
shares.
     In Stanton the directors of the Republic Bank of South
Chicago planned to reorganize, making the bank a wholly owned
subsidiary of a newly formed Delaware chartered bank.  Each share
of Republic stock would be traded for 10 shares of the new bank's
stock.  Certain shareholders dissented from the proposed merger,
not wanting to become shareholders in the new bank.  When the
merger was later approved, the dissenting shareholders refused
the bank's offer to buy their shares and, instead, perfected
their rights under the Banking Act.
     The question is whether these situations significantly
differ from the facts of the present case, making them
distinguishable with regard to the application of discounts for
lack of marketability and minority.
     We find nothing in the Business Corporation Act or the
reported decisions that would make the holdings in Independence
Tube and Stanton inapplicable to this case.  We see no principled
reason to say Independence Tube and Stanton apply only where the
dissenting shareholders could refuse to sell their shares.
     Next this court must consider whether the trial court's fair
value determination was against the manifest weight of the
evidence.  We think it was not.  The $578 per share figure
reached by the dissenters' expert was based on projected models
of the corporation that the trial court found not credible.
     The trial court did state, incorrectly, that no sale of
Weigel stock had ever realized more than $115.  This was clearly
not the case.  Weigel's Exhibit 18, stipulated to by all of the
parties, demonstrates that there were a number of stock
transactions in June and November of 1987 in which Weigel stock
traded for amounts in excess of $115.  Still, the average price
that Weigel stock was bought and sold for during the period of
1980 through 1987 was about $47.  The trial judge gave weight to
that average sale price.
     The trial court's determination that $126 per share was a
fair value for the dissenters' stock was not error.  This figure
was close to the value set by Weigel's expert, whom the court
found to be more credible.  The record indicates that the figure
was reached after a close examination of all of the evidence
presented.  
     The cases cited by the dissenters in which the trial courts
chose not to apply minority and illiquidity discounts are
factually distinguishable.  In Institutional Equipment &
Interiors, Inc. v. Hughes, 204 Ill. App. 3d 922, 931, 562 N.E.2d 662 (1990), the court heard evidence from one party's expert that
the stock value should be discounted 20% for illiquidity. 
Evidence from the opposing expert suggested that a 30% premium
should be added because the stock purchase would turn over
control of the company.  The court rejected both suggestions and
adopted instead the adjusted book value as the fair value of the
stock.  The decision to reject the illiquidity discount, however,
was not based on a finding that such discounts were inapplicable.
     In Hickory Creek Nursery, Inc. v. Johnston, 167 Ill. App. 3d
449, 521 N.E.2d 236 (1988), the court was asked to value
Johnston's one-third interest in Hickory Creek Nursery, which the
court had ordered Johnston to transfer to the corporation as
partial satisfaction of a judgment against him.  Under these
circumstances the court ruled that a minority discount was
inapplicable since the minority interest was being "assumed by
the shareholders resulting in a substantial pro rata increase in
their share and control of the corporation."
     The same situation does not exist in the present case. 
Shapiro always had controlling interest in the Weigel company. 
The shares of the dissenting shareholders did not materially
increase Shapiro's control over, or position within, the company. 
The trial court, we think, was justified in finding the
illiquidity and minority factors had a significant bearing on the
intrinsic value of the stock, especially in the absence of any
claim of oppressive corporate conduct.  For a contrary view, see
C. Murdock, The Evolution of Effective Remedies for Minority
Shareholders and its Impact Upon Valuation of Minority Shares, 65
Notre Dame L. Rev. 425-89 (1990).
     The Interest Award
     The BCA provides that a dissenter is entitled to interest if
the fair value of his shares, as determined by the court, exceeds
the amount paid by the corporation.  In 1987, at the time of
corporate action giving rise to this case, the BCA provided that
interest should be awarded "at such rate as the court may find to
be fair and equitable in all circumstances."
     In 1990 the statute was amended and section (j) was added. 
Section 11.70(j)(2) of the BCA states:
     "'Interest' means interest from the effective date of
     the corporate action until the date of payment, at the
     average rate currently paid by the corporation on its
     principal bank loans or, if none, at a rate that is
     fair and equitable under all the circumstances."
     In this case, since the trial court's fair value
determination of $126 per share exceeded the $115 offered by the
corporation, the dissenters were entitled to interest.  The trial
court awarded 7% simple interest.  Both sides argue that this
interest award was error.
     The dissenters, relying on the amended statute, point to the
fact that Weigel borrowed $300,000 in December 1987 at the prime
rate of 9.59%.  They contend, therefore, that the trial court was
constrained to award interest at the rate of 9.59%. 
Additionally, they say, Weigel wrongly withheld the fair value of
their shares and, thereby, retained the beneficial use of their
monies, allowing them to earn interest on their interest.  For
this reason, the dissenters urge this court to find that an award
of 9.59% interest, compounded quarterly, is necessary to make
them whole.  The dissenters cite one Maine case in which compound
interest was awarded.
     Weigel argues, first of all, that the 1990 amendment to the
statute is inapplicable, so that the trial court was required
only to award a rate that was "fair and equitable."   A fair and
equitable rate, Weigel urges, is the 5% statutory interest rate.
     We find neither argument persuasive.
     In Stanton v. Republic Bank of South Chicago, 144 Ill. 2d 472, 581 N.E.2d 678 (1991), the Court flatly rejected the
proposal that the Illinois interest rate statute should be
applied in situations where dissenters seek a "fair value"
determination for their shares.   In Stanton the court was asked
to assess the "fair value" of stock within the context of the
Illinois Banking Act.  The Court noted that the interest statute
applied in "five specific situations, none of which exist in the
instant case." 
     The Illinois interest statute is inapplicable here. 
Furthermore, Weigel can point to no Illinois valuation case in
which the statutory rate of interest was applied.
     By the same token, the prime rate of 9.59% need not have
been adopted by the trial court as the proper rate.  First, 9.59%
was not an "average rate" of interest paid by the corporation. 
Second, as Weigel points out, the relevant date in this matter is
December 30, 1987. 
     The proper statute for determining the applicable interest
rate should be the statute in effect at that time.  Thus, the
trial court was to award an interest rate that was "fair and
equitable" under the circumstances.  With that as the standard,
as the court stated in Stanton, it was within the trial court's
discretion to award any reasonable rate of interest between the
5% statutory rate and the current prime rate requested by the
dissenters.  The parties have given no persuasive arguments which
would induce this court to depart from the trial court's ruling
that 7% simple interest was appropriate under the circumstances.
     Compound interest is not authorized by the BCA, nor is the
award of compound interest favored in Illinois law.   Tadros v.
Kuzmak, 277 Ill. App. 3d 301, 660 N.E.2d 162 (1995).  In general,
compound interest is available only when there is no statutory
bar and the parties specifically agree to compound interest. 
Helland v. Helland, 214 Ill. App. 3d 275, 573 N.E.2d 357 (1991).
     Furthermore, the court's fair value determination of $126
per share was much closer to the $115 per share offered by Weigel
than it was to the $578 per share fair value asserted by the
dissenters.  There is no reason to believe that Weigel was guilty
of any wrongdoing which might warrant an equitable award of
compound interest.  See Ryan v. City of Chicago, 274 Ill. App. 3d
913, 654 N.E.2d 483 (1995).
     Lastly, we agree with the dissenters that the BCA provides
for the accrual of interest "to the date of payment."  This
specific statutory provision should supersede the general
statutory provision of section 2-1303 of the Code of Civil
Procedure (735 ILCS 5/2-1303 (West 1992)), which provides that
interest ceases to accrue once payment is tendered.  Interest
should be computed from December 30, 1987, until the date that
payment actually is made.  We remand this cause to the trial
court for a hearing to determine whether interest should be based
on the $126 we have found to be the fair value of each share or
on the difference between the $115 tender by the corporation and
$126.
CONCLUSION
     We affirm the trial court's fair value determination and the
award of 7% simple interest.  We modify the trial court's
judgment to provide that interest shall run until the date
payment is made.  We remand this cause to the trial court for a
calculation of interest consistent with this opinion.
     AFFIRMED, MODIFIED AND REMANDED. 
     CAMPBELL and BUCKLEY, JJ., concur.