Court of Appeals of Tennessee Declines to Disregard Delaware Block Method in Valuing Shares of Dissenting Shareholders

In a recent shareholder dispute case, Athlon Sports Communications, Inc. v. Duggan, the Court of Appeals of Tennessee affirmed a decision from the Chancery Court of Davidson County, Tennessee valuing the stock of minority, dissenting shareholders at an amount substantially below the value sought by the minority shareholders.  The case is significant because the Court of Appeals declined to depart from the Delaware Block Method as the method for valuing dissenting shareholders’ shares as the Defendants persuasively, but unsuccessfully, argued that it should.

Here is summary of the key facts:

  • The dissenting shareholders were the Defendants
  • The Defendants owned stock in a company (“Company”) engaged in the sports media and publishing business
  • One of the Defendants had invested in the Company and become its President because he, and the other shareholders, believed that he could turn the Company around
  • The Company was not turned around and the majority entered into a merger which forced the minority shareholders out
  • The Defendants and the Company could not agree on a fair price for the shares of the Defendants: The Company was willing to pay $.10 per share and the Defendants demanded $6.18 per share
  • The Company filed an action for a judicial appraisal
  • The Company’s expert assigned the following weight and values to the three valuation approaches dictated by the Delaware Block Method:
  • Cost of Asset Approach: 80%, value $0
  • Income Approach: 20%, value $0
  • Market Approach: 0%, value $0
  • The Defendants’ expert assigned the following weight and values to the three valuation approaches dictated by the Delaware Block Method:
  • Net Asset Value: 33%, value $6.20 per share
  • Market Value: 33%, value $6.09 per share
  • Earnings Value: 33%, value $7.16 per share

The trial court adopted the valuation of the Company’s expert, but held that the stock had a value of $.10 per share based on the fact that the Company’s trade name had existed for 44 years and had value.  The trial court rejected the valuation of the Defendants’ experts for several reasons, including that it was based on projections of future earnings.

On appeal, the Defendants made several compelling points as to why the strict application of the Delaware Block Method did not fairly value their stock.  They argued that the Delaware Block Method is based on past performance and that was unfair where a business, like the Company, was about to embark on new ventures which were anticipated to be profitable.  Prior to the merger, the Company, to lure investors and capital, had relied on forecasts that showed that the Company’s profitability would increase.

The Defendants also pointed out that Delaware itself no longer strictly applied the Delaware Block Method in the valuation of dissenting shareholders’ shares.

The Court of Appeals made it clear that it was not its place to deviate from the Delaware Block Method which was adopted by the Supreme Court of Tennessee as the method for valuing stock in cases involving dissenting shareholders.

It appears that, had the Court of Appeals decided that it was appropriate to include potential future profitability in the valuation of the Defendants’ shares, it would not have made any difference as the Court commented, in reviewing the trial court’s analysis, that, considering the history of the Company, any future profitability was too speculative to be reliable for valuation.

For lawyers who handle shareholder dispute cases, it will be interesting to see whether or not, if the Defendants apply for permission to appeal to the Supreme Court of Tennessee, and are granted permission, the Supreme Court will modify the method by which dissenting shareholders’ shares are valued. My bet is that, given that Delaware itself has done so, it might just do so.

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