In re 75,629 Shares of Common Stock of Trapp Family Lodge, Inc.
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In re 75,629 Shares of Common Stock (97-175); 169 Vt. 82; 725 A.2d 927
[Opinion Filed 15-Jan-1999]
[Motion for Reargument Denied 18-Feb-1999]
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
No. 97-175
In re 75,629 Shares of Common Stock Supreme Court
of Trapp Family Lodge, Inc.
On Appeal from
Lamoille Superior Court
February Term, 1998
John P. Meaker, J.
Peter F. Langrock of Langrock, Sperry & Wool, Middlebury, and Averill
Laundon of Darby, Laundon, Stearns, Thorndike & Kolter, Waterbury, for
Appellants.
Donald J. Randall, Jr. of Sheehey, Brue, Gray & Furlong, P.C.,
Burlington, for Appellees.
PRESENT: Amestoy, C.J., Dooley, Morse, Johnson and Skoglund, JJ.
JOHNSON, J. This is a dissenters' rights case in which Trapp Family
Lodge, Inc., (TFL) appeals from a decision of the Lamoille County Superior
Court that determined the fair value of the corporation's stock to be
$63.44 per share. TFL argues that the trial court erred by (1) rejecting
the testimony of its expert witness and adopting the valuation of the
dissenting shareholders' expert in its entirety; (2) failing to consider
the tax consequences of a hypothetical sale of corporate assets; (3)
refusing to give weight to share valuations adopted for the purpose of a
shareholders' agreement; and (4) applying a thirty-percent control premium.
We affirm.
The facts as found by the trial court are as follows. TFL was
incorporated in Vermont in 1962 as a holding company for certain assets of
the von Trapp family. TFL's assets include the Trapp Family Lodge,
located in Stowe, Vermont. The Trapp Family Lodge is a resort hotel
complex consisting of a hotel, two residential dwellings, and a
cross-country skiing complex, all located on approximately 100 acres of
land. In addition to the lodge facility, TFL owns approximately 2,200
acres of additional land. At the time of the merger that spawned this
dispute, in January 1995, TFL also owned a timeshare facility known as the
Trapp Family Guest Houses. Timeshare unit owners had exercised an option
to purchase part of this facility, and the remaining $4,517,000 was
payable to TFL in June 1995. Finally, TFL owns some royalty rights from
which it receives annual income. As of the date of the merger, TFL's long
term debt totaled approximately $6,430,700.
In September 1994, TFL gave notice to its shareholders of a special
meeting to be held to consider a proposed merger of TFL into a new
corporation. Prior to the meeting, TFL received notice from the
dissenting shareholders indicating their intent to vote against the merger
and to demand the payment of fair value for their shares. The merger was
duly approved by the shareholders on October 17, 1994 at the special
meeting. Prior to December 1, 1994, the dissenting shareholders, holding
75,629 of the corporation's 198,000 outstanding shares, tendered their
shares and submitted forms demanding payment for them.
On January 28, 1995, TFL notified the dissenting shareholders that the
merger had been completed, and paid the dissenting shareholders $33.84 per
share, which the TFL board of directors estimated to be the fair value of
each share based on a valuation completed by its expert Arthur Haut. On
February 24, 1995, the dissenting shareholders filed demands with TFL for
additional payments for their shares, claiming each share to be worth
$61.00. On March 31, 1995, TFL commenced this action under 11A V.S.A. §
13.30 to determine the fair value of its stock as of the date of the
merger.
The trial court concluded that the dissenting shareholders had
complied with all statutory requirements necessary to entitle them to
receive fair value for their shares. The court fixed the per share value
of TFL on January 28, 1995, the date of merger, at $63.44 based on a
valuation by the dissenters' expert Howard Gordon. TFL appeals, arguing
that the court erred in determining the fair value of TFL shares.
Vermont's Business Corporation Act was amended effective January 1,
1994. See 11A V.S.A. §§ 1.01-20.16; 1993, No. 85, § 7. This case brings
the new dissenters' rights chapter
of this Act before us for the first time. See 11A V.S.A. §§ 13.01-13.31.
Under the new statute, a shareholder of a Vermont corporation who dissents
from certain enumerated corporate actions, including consummation of a
plan of merger, is entitled to obtain from the corporation payment of the
"fair value" of his or her shares. See 11A V.S.A. § 13.02(a)(1). Section
13.01(3) defines "fair value" to mean "the value of the shares immediately
before the effectuation 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." See id. §
13.01(3). This definition mirrors the definition of "fair value" in the
Model Business Corporation Act. See Model Bus. Corp. Act § 13.01 (1978).
The official comment to the Model Act indicates that this broad definition
"leaves untouched the accumulated case law" on the various methods of
determining fair value. Model Bus. Corp. Act § 13.01 cmt. (3).
Dissenters' rights statutes were enacted in response to the common-law
rule that required unanimous consent from shareholders to make fundamental
changes in a corporation. See Hansen v. 75 Ranch Co., 957 P.2d 32, 37
(Mont. 1998). Under this rule, minority shareholders could block
corporate change by refusing to cooperate in hopes of establishing a
nuisance value for their shares. See id.; see also Model Bus. Corp. Act,
ch. 13, Intro. Cmt. (minority demands could be motivated by hope of
nuisance settlement). In response, legislatures enacted statutes
authorizing corporate changes by majority vote. See Hansen, 957 P.2d at
37. To protect the interests of minority shareholders, the statutes
generally permitted a dissenting minority to recover the appraised value
of its shares. See id. Most recent statutes allow dissenting
shareholders to demand that the corporation buy back shares at fair value.
See id.
The basic concept of fair value under a dissenters' rights statute is
that the stockholder is entitled to be paid for his or her "proportionate
interest in a going concern." Weinberger v. UOP, Inc., 457 A.2d 701, 713
(Del. 1983); accord In re Valuation of Common Stock of McLoon Oil Co., 565 A.2d 997, 1004 (Me. 1989); Freidman v. Beway Realty Corp., 661 N.E.2d 972,
976 (N.Y. 1995). The focus of the valuation "is not the stock as a
commodity,
but rather the stock as it represents a proportionate part of the
enterprise as a whole." McLoon Oil, 565 A.2d at 1004. Thus, to find fair
value, the trial court must determine the best price a single buyer could
reasonably be expected to pay for the corporation as an entirety and
prorate this value equally among all shares of its common stock. See id.
Under this method, all shares of the corporation have the same fair value.
See id.
A dissenting shareholder is not in the position of a willing seller,
however, and thus, courts have held that fair value cannot be equated with
"fair market value." See, e.g., McLoon Oil, 565 A.2d at 1005; Hansen, 957 P.2d at 41. Accordingly, methods of stock valuation used in tax, probate
or divorce cases to determine fair market value are inapposite to the
determination of "fair value" under the dissenters' rights statute. See
McLoon Oil, 565 A.2d at 1004 (stock valuation method used in tax and
probate cases not applicable); Hansen, 957 P.2d at 40 (fair market
valuation for purposes of property distribution in marriage distinguishable
from fair value for purposes of dissenters' rights). A shareholder who
disapproves of a proposed merger gives up the right of veto in exchange
for the right to be bought out at "fair value," not at market value. See
Hansen, 957 P.2d at 41.
Finally, a fair-value determination is "necessarily a fact-specific
process." McLoon Oil, 565 A.2d at 1003; accord Bogosian v. Woloohojian,
882 F. Supp. 258, 261 (D.R.I. 1995). "[T]he weight to be given to
particular evidence is a matter within the sound discretion of the trial
court." Waller v. American Int'l Distrib. Corp., ___ Vt. ___, ___, 706 A.2d 460, 463 (1997); see also Chokel v. First Nat'l Supermarkets, Inc.,
660 N.E.2d 644, 650 (Mass. 1996) (valuation of dissenting shareholder's
stock is question of fact within discretion of trial judge). Moreover,
the trial court's findings of fact will not be set aside unless clearly
erroneous. See V.R.C.P. 52(a). We now address TFL's arguments in turn.
I.
TFL first argues that the trial court's valuation was clearly
erroneous because it relied on the testimony of the dissenters' expert,
Gordon, and rejected the testimony of TFL's expert,
Haut. Although we do not find it necessary to detail the valuations by
each expert to address the legal issues presented, an overview of the two
approaches provides some context for our discussion. The dissenters'
expert, Gordon, a certified financial analyst, conducted his appraisal
using a net-asset-value approach; he used different methods to arrive at
the values for individual assets, which were the lodge, the guest house
option, the other guest house subsidiary assets, the royalties, and the
excess land. Gordon used two methods to determine the value of the lodge.
First, he used a discounted-cash-flow method; the value of the lodge added
to the value of TFL's other assets resulted in a share value of $64.00.
Second, Gordon recalculated the net assets value using a prior real estate
appraisal by Frank Bredice for the lodge; the Bredice value of the lodge
added to the other TFL assets resulted in a share value of $62.67.
Averaging these results, Gordon determined that the fair value of TFL was
$63.44 per share.
TFL's expert, Haut, a certified public accountant, separated TFL's
assets into three separate groups: the lodge facility and related
operations, the excess land, and the guest house option. He used a
capitalized-cash-flow method to value the lodge facility, relied upon the
Bredice appraisal to determine the value of the excess land, and valued the
guest house option by discounting the option price to a present value.
Using these methods, Haut valued TFL in its entirety at $6,700,000, which
yields a per share value of $33.84.
The trial court held that the fair value of TFL was $63.44 per share,
as established by Gordon. The court rejected Haut's appraisal for several
reasons, including (1) Haut's valuation lacked the thoroughness and
credibility of Gordon's valuation and the Bredice appraisal, (2) Haut
unreasonably assumed TFL's earnings would not grow, (3) Haut valued the
lodge operations at $7,300,00 in 1992, $7,000,000 in 1993, but then at
only $4,748,000 for 1994, and (4) Haut overstated income taxes reducing
after-tax cashflows.
On appeal, TFL argues that the court erred by adopting one expert's
valuation wholesale and completely rejecting the valuations of the other
experts. TFL relies on Gonsalves v. Straight Arrow Publishers, Inc., 701 A.2d 357, 362 (Del. 1997), which reversed the trial court's fair-
value determination because the court had relied upon the valuation of one
expert to the total exclusion of the valuation by the other expert.
Gonsalves is distinguishable for two reasons. First, in Gonsalves, the
court was presented with two widely divergent values: $1,059.37 and
$131.60 per share. Here, the evidence included Gordon's lodge valuation
($9,355,000) and the Bredice lodge appraisal ($9,982,000), which was
remarkably close to Gordon's valuation. On the other hand, Haut's
valuation ($4,748,000) differed significantly from Gordon's valuation, the
Bredice appraisal and even Haut's valuations for the two previous years
($7,300,000 in 1992 and $7,000,000 in 1993). Thus, the court here was not
faced with the either-or evidence the court faced in Gonsalves. Second,
essential to the court's reversal in Gonsalves was that the trial court
had announced prior to trial that it intended to choose one expert's
valuation in total. The Supreme Court of Delaware concluded that the
court's either-or approach conflicted with its statutory obligation to
engage in an independent valuation. See id. at 361-62. Here, there was
no pretrial decision to adopt such an approach.
TFL presents five specific reasons why Gordon's valuation was
unreliable. First, TFL claims that the court abused its discretion by
adopting Gordon's discounted-cash-flow-valuation method because it is
highly speculative as it is based on future financial performance rather
than historical financial data. Under the dissenters' rights statute,
however, a valuation may be based on any method generally considered
acceptable in the financial community and otherwise admissible in court.
See McLoon, 565 A.2d at 1003; Weinberger, 457 A.2d at 713. Here, three
experts testified that the discounted-cash-flow-valuation method was
considered acceptable in the financial community; thus, the court's
decision to accept this method of valuation for the lodge operations was
within its discretion. See Waller, 706 A.2d at 463 (weight to be given to
particular method of valuation is within sound discretion of court); see
also In re Radiology Assocs., Inc., 611 A.2d 485, 490 (Del. Ch. 1991)
(Delaware courts have affirmed validity of discounted-cash-flow method of
valuation repeatedly). And contrary to TFL's claim, the court did not
rely exclusively on the discounted-cash-flow method of valuation. Gordon's
valuation
of the lodge operations was based on averaging his discounted-cash-flow
valuation of $9,355,000 and Bredice's fair-market-value appraisal of
$9,982,000. The latter value was also comparable to national hotel
industry sales data.
Second, TFL maintains that the trial court erred by adopting Gordon's
three-percent growth rate because it was not supported by credible
evidence and was not reasonable. The three-percent growth rate was
supported by (1) TFL's comptroller's testimony that TFL's revenue
increased three and one-half percent from 1993 to 1994, (2) a memorandum
from TFL management to stockholders prior to the merger projecting
substantial growth in the future, (3) a report submitted to shareholders
with the memorandum indicating an expected growth rate of four percent for
1994 and further improvement expected based on national trends for 1995,
and (4) Gordon's analysis of historical and projected revenue rates for
the lodge and national hotel industry statistics. Based on this evidence,
the court found that a three-percent growth rate was reasonable. We
agree. See Rubin v. Sterling Enterprises, Inc., 164 Vt. 582, 588, 674 A.2d 782, 786 (1996) (factual findings will be upheld on appeal unless there is
no credible evidence to support finding).
Third, TFL argues that the evidence does not support Gordon's use of a
discount rate of 8.6 percent. TFL relies primarily on material submitted
to this Court with its brief in appendix IV. The dissenters have moved to
strike the appendix on the ground that the material contained therein was
not admitted into evidence before the trial court and, therefore, is not
part of the record. We agree and strike appendix IV. See V.R.A.P. 10(a);
State v. Brown, 165 Vt. 79, 82, 676 A.2d 350, 352 (1996) (documents not on
file in trial court cannot be part of record on appeal). The record
indicates that the 8.6 percent discount rate was derived from methods
generally accepted in the financial community for valuing businesses.
Moreover, despite TFL's claims that Gordon's discount rate was
inappropriately low, the evidence indicated that Gordon's discount rate
did not differ significantly from Haut's capitalization rate. Most of the
difference in their lodge valuations stemmed from Haut applying a zero
growth rate and failing to account
for depreciation in a generally accepted method.
Fourth, TFL maintains that the court's reliance on the Bredice
appraisal was clearly erroneous because the court rejected the
capitalized-cash-flow method used by Haut, but accepted the Bredice
appraisal using the same method. Gordon explained, however, his limited
use of the Bredice appraisal. According to Gordon, if the liquidation
value of the business is greater than the operating value, then the
liquidation value should prevail. Consequently, Gordon reviewed the
Bredice real estate appraisal, determined that it was reliable, and
considered it as the lodge liquidation value against which he could check
his operation value. Because the two values were so close, he gave equal
weight to each by averaging the two values. Haut, on the other hand, used
a valuation method that the court found less appropriate than Gordon's
method, but more importantly, the court found that Haut did not use the
method accurately. There was no error in using a valid real estate
appraisal as a check on the discount-cash-flow-method valuation, while
rejecting a valuation made solely on an inaccurate and unreasonable
application of the capitalized-cash-flow method.
Fifth, TFL contends that the trial court erred by accepting Gordon's
valuation and expense adjustments. The court found that Gordon eliminated
extraordinary, non-recurring expenses from his calculation, which is a
generally-accepted adjustment for business valuation. This finding is
supported by the record. See Waller, ___ Vt. at ___, 706 A.2d at 464
(recognizing that adjustments to income statement are often necessary to
show an accurate profit picture). Indeed, Haut also made some adjustments
to the income statements, such as adding back payments made to family
members. TFL has submitted a list of other alleged errors made by Gordon.
Although referencing Gordon's testimony in the record, TFL provides no
support for most of its claims that the statements were erroneous. The
court made an adjustment for the single error that was acknowledged by
Gordon. To the extent that the other statements to which TFL objects
reflected on Gordon's credibility, the trial court was in the better
position to make this evaluation. See Bruntaeger v. Zeller, 147 Vt. 247,
252, 515 A.2d 123, 126 (1986) (it is
province of trial court to determine credibility of witnesses and weigh
persuasive effect of evidence).
We conclude, therefore, that the trial court's finding setting the
fair value of TFL's stock at $63.44 is supported by the evidence and is
not clearly erroneous.
II.
TFL next contends that the court erred as a matter of law by failing
to consider the tax consequences of a potential sale. According to TFL, a
potential buyer of a corporation would consider the potential tax
consequences of the purchase, and therefore, the trial court should have
considered the tax consequences of a liquidation of the corporation's
assets. TFL points to appendices I, II and III submitted in support of
its brief to illustrate the tax consequences of a sale of TFL assets. The
dissenters move to strike the appendices because these documents were not
admitted into evidence at trial. We do not consider the appendices on
appeal because we conclude that the trial court correctly determined that
no tax consequences of a sale of corporate assets should be considered
where no such sale is contemplated.
Under the dissenters' rights statute, the court is required to value
the corporation as "a going concern." Weinberger, 457 A.2d at 713.
Accordingly, courts have generally rejected any tax discount "unless the
corporation is undergoing an actual liquidation." Hansen, 957 P.2d at 42;
see also Bogosian v. Woloohojian, 882 F. Supp. at 266 (only when
corporation has committed to sale of assets may tax impact, if any, be
considered). Here, there was no evidence that TFL was undergoing
liquidation on the valuation date. Indeed, the evidence indicated that
TFL was a going concern. Thus, the trial court correctly declined to
consider the tax consequences of the sale of any assets.
TFL maintains that it will have to sell assets in order to pay the
dissenters for their shares, and that therefore the tax consequences of
the sale should be considered in the valuation. Under the dissenters'
rights statute, however, the dissenters are entitled to a pro rata share of
the fair value of the corporation immediately before the merger. See 11A
V.S.A. § 13.01(3)
(value shares immediately before effectuation of corporate action to which
dissenter objects). "Thus, if costs are incurred after effectuation of
the exchange, those costs should not be assessed against the dissenting
shareholders." Hansen, 957 P.2d at 43. Accordingly, it would be
inappropriate to consider a future sale of assets to determine the fair
value prior to merger. See id. (rejecting tax discount in fair value
determination where corporation is not undergoing liquidation); see also
Bogosian v. Woloohojian Reality Corp., 973 F. Supp. 98, 107 (D.R.I. 1997)
(rejecting similar tax-consequences argument by corporation because it
would be inequitable to order dissenter to reimburse corporation for tax
consequences of buy-out where dissenter undoubtedly would also face tax
consequences).
III.
TFL next contends that the trial court erred as a matter of law by
refusing to consider certain "agreed values" determined pursuant to a
shareholders' restriction agreement. Under the agreement, a shareholder
who desired to transfer shares to anyone other than ascendants or lineal
descendants was required to offer the shares first to TFL. If TFL declined
to purchase them, then the shareholder was required to offer the shares to
the remaining shareholders. The purchase price for the shares was
determined by an "agreed value" established by the stockholders of at
least seventy-five percent of the outstanding shares. In the absence of an
"agreed value," the stock price was set by "book value" calculated pursuant
to the procedures in the agreement. The agreed value under the stock
restriction agreement for 1992 was $28.78 and for 1993 was $30.92. The
trial court found that the agreed values were based upon the fair market
value for minority interest shares and were not timely representations of
the "fair value" of the shares in January 1995. TFL claims it was
reversible error to accord no weight to the "agreed values."
In close corporations, "shareholders' agreements restricting the
manner in which shareholders may dispose of their shares are quite
common." Hansen, 957 P.2d at 37. Such an agreement does not apply,
however, to a fair value determination pursuant to the dissenters'
rights statute unless the agreement so provides. See id. at 37 (rejecting
shareholders' agreement in determining fair value because agreement did
not contemplate a fundamental change in corporate form such as merger);
see also In re Pace Photographers, Ltd., 525 N.E.2d 713, 718 (N.Y. 1988)
(fair value under minority buy-out statute not determined by shareholders'
agreement concerning voluntary sale of stock). The shareholders' objective
in establishing an agreed value for voluntary sale of shares may be very
different than the court's objective in determining fair value in a
dissenters' rights case. See Pace Photographers, 525 N.E.2d at 719.
Similarly, the restriction agreement here is not applicable because it
did not contemplate establishing share values for a corporate merger.
Moreover, the agreed values for 1992 and 1993 were not indicative of the
fair value in January 1995 because they were untimely in the sense that
they were no longer in effect, and because they were based on fair market
value of a minority interest. The court weighed these factors and was not
persuaded that the agreed values provided any basis for the fair value in
January 1995. It was within the court's discretion to determine the
weight to be given any particular evidence. See Waller, ___ Vt. at ___,
706 A.2d at 463.
IV.
TFL next argues that the trial court's application of a thirty-percent
control premium was clearly erroneous. Gordon testified that, in applying
the discounted-cash-flow-method to value the lodge, he relied on figures
derived from publicly traded companies and that the per share value of a
share on the public market is a minority interest value. Thus, even if
this value is multiplied by the number of outstanding shares, the total
reflects an accumulation of minority interests; it does not reflect the
value of a controlling interest. A controlling interest is of greater
value than a minority interest because the controlling shareholder has
control over operation of the corporation. Because Gordon's valuation was
based on publicly-traded minority interest values, he applied a control
premium to account for the value of control in owning the lodge as a
whole. For the same reason, Haut also applied a control premium in his
valuation.
Based on this evidence, the trial court applied a control premium in
deciding fair value.
Under the circumstances presented here, there was no legal error in
applying a control premium to adjust a valuation that reflected publicly
traded minority interests. See Rapid-American Corp v. Harris, 603 A.2d 796, 806 (Del. 1992) (reversing trial court's valuation for failing to
apply a control premium where corporation had one hundred percent interest
in three subsidiaries and valuation of subsidiaries was based on publicly
traded value, which represented discounted minority values). TFL relies
on appendices IV and V to contest application of a control premium.
Again, this material was not admitted into evidence at trial, and thus, we
do not consider it here on appeal. The expert testimony at trial
supported the court's use of a control premium.
TFL further argues that even if a control premium is appropriate,
there is no evidence in the record to support the trial court's finding
that a thirty-percent premium is reasonable, if not somewhat conservative.
Gordon testified, however, that the average control premium for the hotel
and motel industry was forty-six percent. Haut applied a fifteen-percent
control premium. Gordon applied a thirty-percent control premium and
stated that this figure was on the conservative side. The court's
findings are supported by the evidence. See Wyatt v. Palmer, 165 Vt. 600,
601, 683 A.2d 1353, 1356 (1996) (court's findings upheld if supported by
reasonable evidentiary basis).
Affirmed.
FOR THE COURT:
_______________________________________
Associate Justice
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