In a 1983 case, Blasingame v. American Materials, Inc., 654 S.W. 2d 659 (Tenn. 1983), the Supreme Court of Tennessee adopted what is called the “Delaware Block” method for determining the fair value of shares in dissenters’ rights cases in Tennessee.  This method, considered alone, was already outdated by precedent case law in Delaware when Blasingame was issued.  However, in the recent Athlon Sports Communications case, the Tennessee Supreme Court finally brings Tennessee dissenters’ rights appraisal determinations more in line with the majority of states.

The Blasingame Ruling

In Blasingame, the Tennessee Supreme Court adopted the Delaware Block rule or method for determining statutory fair value in appraisal cases.  Under the basic application of the Delaware Block method, an appraiser first determines the value of the subject corporation under each of the three valuation methods identified in Tri-Continental Corp. v. Battye,  74 A. 2d 71 (Del. 1950), a 1950 Delaware case.

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.

While I have not personally handled a fair value case in Tennessee in a number of years, I can attest to the fact that in the 1980s and 1990s, I would not render a fair value appraisal without using the Delaware Block method.

 Athlon Sports Communications

Athlon Sports Communications was filed on June 8, 2018.  The company, Athlon Sports Communications, Inc. (“Athlon”) had been in business for more than fifty years leading to late 2011, when Athlon engaged in a recapitalization transaction that effectively squeezed out certain shareholders, including Mr. Stephen Duggan (the lead defendant), who was previously an officer and investor in Athlon.

As an aside, under Tennessee law, when shareholders dissent to transactions and perfect their dissents, it is the corporations that file the appraisal cases, so Mr. Duggan, while the economic plaintiff, is the defendant in this case.

The Company was successful for many years but fell on hard times during the Great Recession in 2008-2009.  Mr. Duggan invested $1.5 million in the company for a 15% interest (plus the opportunity to acquire restricted shares totaling an additional 10% ownership in Athlon).  He prepared a business plan that was approved by the board of directors, was hired, and proceeded to attempt to implement the plan.

The Supreme Court provides some detail about the company and its history, but suffice it to say that the new business plan, while increasing circulation, did not generate profitability.  By late 2011, having sold its previously owned building for $3.9 million to pay down debt and generate working capital, Athlon was in need of substantial equity capital.

The need for more capital gave rise to the transaction reviewed by the Supreme Court.

The experts for Athlon and the dissenters both employed the Delaware Block method, but also used the discounted cash flow method.  The expert for Athlon concluded that the fair value of shares as of the transaction date was $NIL, meaning zero.   Athlon ultimately offered the dissenters $0.10 per share as the fair value of their shares based on their expert’s opinion and the board’s judgment.

The dissenters’ expert found a variety of values ranging from $6.48 per share (using the Delaware Block method), to $4.55 to $9.58 per share (based on comparable public companies), to $22.32 per share (using the discounted cash flow method).

The trial court found that the company’s expert was the more credible and concluded that the fair value of the shares was $0.10 per share.

The case went to the Tennessee Court of Appeals and then, ultimately, to the Supreme Court of Tennessee.  Given the case’s winding course, we could spend many pages describing the transaction, the trip through Chancery Court and the Court of Appeals, and the Supreme Court’s description of events, and the work of the two experts in the matter.  Instead, we will focus briefly on the Court of Appeals decision, which affirmed the trial court, and on the Supreme Court’s conclusions in Athlon Sports Communications.

The Court of Appeals

The dissenting shareholders appealed, arguing first that the trial court erred in relying exclusively on the Delaware Block method in its fair value determination because of its focus on the past, rather than on prospective performance.

In the alternative, the dissenting shareholders argued that even if the Delaware Block method was the appropriate method to use, the trial court erred in its application of the method.

The Court of Appeals rejected both arguments regarding each of the defendants’ arguments in its decision:

“[t]he Trial Court correctly followed Tennessee case precedent in utilizing the Delaware Block Method of valuation…”

The Court of Appeals noted that Blasingame specifically adopted the Delaware Block method while acknowledging the Delaware Supreme Court’s criticism of the method in Weinberger.  The Court of Appeals went on to say that, “[i]f the holding of Blasingame . . . is to be reversed or modified by a Tennessee Court, it is the Tennessee Supreme Court that will have to do it and not this Court.”

The Court of Appeals also rejected the defendants’ second argument regarding the application of the Delaware Block method, holding that the trial court’s findings were supported by the evidentiary record.  The Court of Appeals clouded the record a bit with a comment regarding Athlon’s projections noting “that it seems an odd circumstance, to say the least, that forecasts made by and represented as reliable at the time are now dismissed as unreliable.”  Having said this, the Court of Appeals said that the trial court was justified in giving “little or no credence to Athlon’s forecasts.”

As an aside, the Supreme Court noted in its analysis that the referenced forecasts, which were prepared in connection with raising new capital, were “aspirational.”

The Court of Appeals affirmed the trial court’s decision in all respects.

It seems that the Court of Appeals set it up for the Supreme Court to address an issue that could (should?) have been addressed 35 years ago in Blasingame.

The Supreme Court’s Ruling

The Supreme Court granted permission to appeal in Athlon Sports Communications to address the methods by which a trial court may determine the “fair value” of the shares of dissenting shareholders under Tennessee’s dissenters’ rights statutes (Tennessee Code Annotated sections 48-23-101, et seq.).

Both experts in this matter employed the Delaware Block method, and both also advanced their opinions under the discounted cash flow method, albeit with widely differing results.

The defendants’ appeal raised some confusion over whether the trial court relied solely on the Delaware Block method in reaching its conclusion, or if it considered the discounted cash flow methods.  This “confusion” was possible because, as I read the case:

• Athlon’s expert employed both the Delaware Block method and the discounted cash flow method. He reached a conclusion of fair value or $NIL in both cases.
• Defendants’ expert used the Delaware Block method, the guideline public company method, and the discounted cash flow method, reaching a range of conclusions, as noted above, substantially greater than $NIL.

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 Weinberger approach, 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 business and valuation perspectives.  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.

The Supreme Court, however, did not dismiss consideration of the Delaware Block method by business appraisers or trial courts, stating:

The Delaware Block method of valuation remains available where appropriate, but trial courts may now choose to use another valuation method to determine the fair value of a dissenting shareholder’s shares of stock.

The Supreme Court then moved to eliminate any confusion in the trial court’s opinion over the use of the Delaware Block method – or not.  Normally when trial courts’ orders are vacated or reversed, it is a bad thing for the trial court (at least that’s my observation as a non-lawyer).  The court noted:

Because we cannot determine on this record whether the trial court’s evaluation of the evidence was affected by its perception that Blasingame mandated use of the Delaware Block valuation method, we vacate the trial court’s order and remand for reconsideration the valuation of the dissenting shareholders’ shares in light of our decision herein.

The decision of the Court of Appeals is reversed, the decision of the trial court is vacated, and the case is remanded for further proceedings consistent with this opinion…

With the Supreme Court’s decision, the Court of Appeals is reversed, but, it appears (to me at least), in a friendly way. In addition, the trial court, whose order was vacated, has an opportunity to “get it right for sure” given the new decision regarding the Delaware Block method and the use of more modern valuation methods.

After Athlon Sports Communications in Tennessee

Appraisers and courts can use the Delaware Block method in Tennessee fair value determinations – if its use is appropriate.  And they (we) can use more modern valuation methods like the discounted cash flow method – again, where its use is appropriate and does not include expected benefits from the merger.

What is not clear in Athlon Sports Communications is whether or not it is appropriate to use valuation discounts such as minority interest discounts or marketability discounts.  Neither Blasingame nor Athlon Sports Communications address the issue of the applicability of valuation discounts in fair value determinations.

In the Tri-Continental decision quoted in Athlon Sports Communications, we learn from the Delaware Supreme Court:

[1] The basic concept of value under the appraisal statute is that the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern.  By value of the stockholder’s proportionate interest in the corporate enterprise is meant the true or intrinsic value of his stock which has been taken by the merger.  In determining what figure represents this true or intrinsic value, [2] the appraiser and the courts must take into consideration all factors and elements which reasonably might enter into the fixing of value.  Thus, market value, asset value, dividends, earning prospects, the nature of the enterprise and any other facts which were known or which could be ascertained as of the date of the merger and which throw any light on future prospects of the merged corporation [3]are not only pertinent to an inquiry as to the value of the dissenting stockholders’ interest, but must be considered by the agency fixing the value.

[parentheticals and emphasis added]

Regarding [1] above, it could be argued that a “proportionate interest in a going concern” necessarily means that fair value represents a dissenting shareholder’s interest in the value of a company as a whole and as a going concern.  That interpretation would not include valuation discounts such as minority interest and marketability discounts.

As an aside, however, that same language appears in New York fair value cases, and New York courts sometimes (although less frequently than in years past) consider marketability discounts, with courts and appraisers arguing first over whether a marketability discount should be applied, and then over whether the marketability discount should apply to an interest or to a an entire corporation.

Parentheticals [2] and [3] leave open for discussion “all factors” regarding “the value of the dissenting stockholders’ interest[s].”  The stockholders’ interests are always (or nearly always) minority interests in corporations.

Yet to be argued in a Tennessee court is the applicability of valuation discounts, either for a proportionate interest in a going concern or as a dissenting stockholders’ [minority] interest.

The great majority of other jurisdictions that have addressed the issue have held, either by statute or by judicial interpretation, that valuation discounts are not appropriate for application in fair value determinations.

It seems that there is at least one more chapter to be written by the Tennessee Supreme Court (or the Tennessee Legislature) before the appropriate means of fair value determination in dissenting stockholders’ cases is finally and fully set in Tennessee.  I hope there is never an issue, but I can foresee that the issue will come up in future dissenting stockholder cases.  Time will tell.

Be well,

Chris

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