Shareholders of Tennessee corporations, under certain circumstances set forth in Tenn. Code Ann. §48-23-102, have the right to “dissent” and to require the corporation to pay them for the “fair value” of their shares. How do Tennessee courts determine the “fair value” of a dissenter’s shares? For Tennessee lawyers who handle shareholder disputes, the three Tennessee cases discussed below provide a valuable road map in dissenters cases.
The Supreme Court of Tennessee, in the 1983 case Blasingame v. America Materials, Inc., held that the “Delaware Block Method” should be used in Tennessee to determine the fair value of a dissenting shareholder’s shares. The Delaware Block Method requires that the court consider three different methods used to value shares: (1) the market value method; (2) the asset value method; and (3) the earnings value method. Once the court determines the value of a share of the dissenter’ stock according to each method, the court must assign a weight, expressed as a percentage of 100%, to the stock value as determined by each method.
The market value method looks at the price for which a share of the corporation’s stock could be sold if there were a willing buyer. The asset value method values a share of the corporation’s stock according to its pro rata value as to the net assets of the corporation. The earnings value method values a share of the corporation’s stock based on its earnings potential which, in turn, will be based on historical earnings.
Tennessee cases have recognized that there is no precise method for determining the weight to be assigned to each valuation method, and, thus, the trial court has substantial discretion in such determinations. So, in a shareholder dispute case in Tennessee, what factors will a trial court consider in determining what weight to apply to each valuation method?
The court in the Blasingame case was not required to decide how much weight each method should be given in that case as the only issue before it was whether the trial court did or did not use the appropriate valuation method. The court, however, relied extensively and approvingly on a case from North Dakota, the Brown case, in which the court used the following percentages to weigh the different valuation methods:
Market value method 25%
Asset value method 50%
Earnings method 25%
The court in the Brown case, relying extensively on case law from Delaware, stated that the market value method should be given great weight where there is an established market for the stock, but no weight when market value cannot be determined. In most shareholder disputes in Tennessee involving closely held corporations, there is unlikely to be any reliable way to establish market value. Thus, in those cases, market value will probably be given little, if any, weight.
With respect to the asset value method, the Brown court assigned a weight of 50% because, in that case, the corporation held assets (lots and buildings) which were expected to appreciate. In cases where a corporation holds assets for the purpose of appreciating them, this method will have greater weight. With respect to the earnings method, the Brown court pointed out that normally this factor is given great weight as most businesses are operated to earn profits and not to hold assets which appreciate.
In a 1987 case, the Elk Yarn Mills case, the Court of Appeals of Tennessee approved the trial court’s weighing the three methods as follows:
Market value method 5%
Asset method 35%
Earnings method 60%
In that case, the corporation owned a plant and some land, although the opinion does not provide any details about the value of those.
In a 1994 case, the Genesco, Inc. case, the Court of Appeals of Tennessee approved the trial court’s weighing the three methods as follow:
Market value method 0%
Asset value method 80%
Earnings method 20%
In that case, there was no trading history on which to try to establish market value and the company’s balance sheet showed a strong cash position.
If you are involved in a dissenting shareholders lawsuit involving the determination of fair value, also keep in mind that, in the Blasingame case, the Supreme Court of Tennessee held that: “any valuation of earnings which does not take into consideration a minimum of three years corporate experience should be rejected” unless an expert witness clearly and convincingly establishes that it is valid to use a lesser period.