Several months ago, I wrote a post about a recent ruling of the Tennessee Supreme Court addressing the issue of statutory fair value in Tennessee. The post was titled Tennessee Supreme Court Addresses Statutory Fair Value for the First Time in 35 Years in Athlon Sports Communications. The Supreme Court reversed the trial court and remanded the case for reconsideration.
In my earlier post, I called this a “friendly reversal” because the Supreme Court reversed with what seemed to me to be an invitation for the trial judge to reach the same conclusion and to be consistent with the Supreme Court’s new ruling.
The Old Law
For decades, the “law of the land” in Tennessee statutory fair value determinations required business appraisers to employ what was (and is) called the Delaware Block method for determining fair value. The leading case was Blasingame v. American Materials, Inc., 654 S.W. 2d 659 (Tenn. 1983).
The methods are (a) the market value method, (b) the asset value method, and (c) the earnings value method. The conclusion under the Delaware Block is a weighted average of the three methods, with the weights to be assigned by the appraisers or the courts. The weights for each method took into account the type of business, the objectives of the corporation, and other relevant factors.
In the seminal 1983 case of Weinberger v. UOP, Inc., (457 A.2d 701 (Del. 1983), the Delaware Supreme Court concluded that although the Delaware Block method had been used for stock valuation for decades, it was outmoded because it “excludes other generally accepted techniques used in the financial community and the courts…”
The Delaware Supreme Court concluded, “It is time we recognized this in appraisal and other stock valuation proceedings and bring our law current on the subject.” In Weinberger, the “other techniques” that were excluded under the Delaware Block method included the discounted cash flow method, which was advanced by the dissenters’ expert in that case.
Blasingame was issued shortly after Weinberger. While Weinberger was not mentioned in Blasingame, the petition to rehear was appended to the end of the case. Noting Weinberger in a footnote to the petition to rehear, the Tennessee Supreme Court stated that it did “not find anything in Weinberger that cause[d it] to alter the adoption of the weighted average method.” [i.e., the Delaware Block method]
That resounding adoption of the Delaware Block method by the Tennessee Supreme Court, together with its rejection of the then recent guidance regarding more current techniques from Weinberger, essentially made the Delaware Block method the law of the land in Tennessee from 1983 until the issuance of Athlon Sports Communications.
The New Law
Given the record at the trial court and the Court of Appeals dodging (or passing the buck) of the underlying issue in Blasingame, the Supreme Court provided a new interpretation for fair value determinations in dissenters’ rights matters:
Given the nearly universal approval the Weinberger approach has won in the years since Blasingame, we overrule Blasingame to the extent that it implies that trial courts are allowed to use only the Delaware Block method of valuation. We adopt the more open Weinbergerapproach, which allows “proof of value by any technique or methods which are generally considered acceptable in the financial community and otherwise admissible in court.”
As in Weinberger, the Tennessee Supreme Court adopted the explicit exclusion against considering speculative elements of value that could arise as a result of the accomplishment or expectation of the merger [i.e., the merger giving rise to the dissenters’ rights appraisal].
However, the Supreme Court made it clear, at least to this reader, that the discounted cash flow method can be considered, stating:
But elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.
I read this language, as all cases, from a business and valuation perspective. It says to me that it would be appropriate to consider reasonable projections of a business (“which are susceptible of proof as of the date of the merger”), excluding any consideration of changes that might be anticipated from a merger.
I described the Supreme Court’s reversal and remand to the trial court as “friendly.”
Upon Remand to the Trial Court
The trial court issued its opinion last week. The full opinion is under seal until the parties can agree what if any information included in the Chancellor’s analysis is deemed confidential. By the way, I can’t imagine what in the trial court’s opinion could matter if disclosed in late 2018. The action giving rise to the matter occurred in 2011, a long time ago. But they continue to fight a bit.
In the meantime, I was provided with a one paragraph summary from the Chancellor’s opinion.
Chancery Court Part III
Athlon Sports Communications, Inc, v, Stephen Duggan, et ah, No. 12-17S7-III
Ruling on Remand
Upon remand, using the present record, and having reconsidered the valuation of the dissenting shareholders (footnote omitted) shares in light of the Tennessee Supreme Court overruling Blasingame v. American Materials, Inc., 654 S.W.2d 659 (Tenn. 1983) and adopting the open approach of Weinberger v, UOP, Inc., 456 S.2d 701, 712-13 (De. 1983), this Court finds, in accordance with Paragraph 2 of the Plaintiffs prayer for relief, that the fair value of the shares in issue is no greater than the $0.10 per share amount paid by the Plaintiff. Consistent with this determination, the Defendants’ requested relief of a valuation of $6.18 per share is denied and dismissed with prejudice.
First, the Supreme Court did overrule Blasingame, but only to the extent that it was an exclusive method for fair value determinations in Tennessee. Appraisers and courts are still free to use the Delaware Block method, but they are also free to use more modern techniques like the discounted cash flow method (as allowed in Weinberger).
The bottom line is that the trial court reached the same conclusion on remand that it had reached in the original trial decision. There had been some confusion on the record as to whether the trial court had used the Delaware Block method or exactly how its decision had been reached. The reversal and remand allowed the trial court to reach the same conclusion but to “get it right” in relationship to the Supreme Court’s decision.
There were no surprises in the trial court’s decision on remand. If there is newsworthy analysis in the Chancellor’s opinion, I’ll write further about Athlon when it becomes available publicly.
The Future of Fair Value in Tennessee
Fair value in Tennessee embraces the Delaware Block method of Blasingame but also allows the “more modern” tools of finance (like the discounted cash flow method) first approved in Weinberger. Chances are, the Weinberger portion of the guidance will lead the way in the future.
However, as I noted in the previous post on Athlon, there remains the potential question of whether (or not) certain valuation discounts might apply in Tennessee fair value determinations. While no discounts were applied in Athlon, there was no discussion or proof regarding them.
Most jurisdictions do not allow for the imposition of minority interest or marketability discounts. If I had to guess, that’s the way Tennessee will likely lean if the question arises in the future. By the way, I don’t guess as a lawyer, but as a business appraiser and businessman with experience in numerous other jurisdictions.
Until next time, be well!
New Book on Buy-Sell Agreements
The drafting of a new book on buy-sell agreements is complete. We sent the draft to a number of external reviewers yesterday and the publication is coming soon. The working title is Buy-Sell Agreement Handbook for Attorneys. I am not an attorney. As always, I write based on my experience as a businessman and valuation guy.
My previous books on buy-sell agreements have been written from the perspective of business owners as in the title of the most recent book: Buy-Sell Agreements for Closely Held and Family Business Owners. Attorneys were, thankfully, one of the bigger markets for this book.
Many times, however, attorneys have said to me, in effect, “Chris, we like the ideas in your book. Do you have some template language to help us implement them?”
Until now, unfortunately, the answer was a “Not yet.” Now, this new book will contain detailed template language for several valuation processes for buy-sell agreements. I’m excited to get it to the point of making it available to attorneys, business appraisers, financial planners and, yes, business owners.
If you want to be notified when Buy-Sell Agreement Handbook for Attorneys becomes available, give me a quick email and we will put you on the list at email@example.com.