A while back, I posted a two part series on Dissenters’ Rights: Pt. 1, Who Are They? And Who Has Them? and Pt 2, Valuation. This week, we return to the topic with two hallmark cases on “fair value”: Sentinel C3 v. Hunt, and Eagleview Technologies v. Pikover. As discussed in my prior post, in appraisal proceedings, dissenters are entitled to “fair value” of their interest, whether the interest is in a corporation or an LLC.
Fair Value – What It Is & What It Is Not
“Fair value” is often misconstrued as “fair market value.” “Fair market value” may have bearing on “fair value” in an appraisal proceeding, but it is not dispositive in the valuation. In the two cases that follow, I discuss how competing valuations affect the “fair value” analysis, and what “fair value” really means.
The Case: Sentinel C3 v. Hunt
In Sentinel C3, Inc. v. Hunt, shareholders Hunt and Blood filed a dissenters’ rights action against Sentinel C3, after a majority of Sentinel C3’s shareholders approved a reverse stock split. See Sentinel C3, Inc. v. Hunt, 181 Wash.2d 127, 142 (2014). The crux of their action revolved around the fair value of the shares Hunt and Blood owned (22.2% and 5.6% interest respectively). Sentinel C3 provided a valuation report pricing Hunt’s total interest at $195,200 and Blood’s at $48,800. As dissenting shareholders, Hunt and Blood were entitled to payment for the “fair value” of their shares, plus interest, as of the date immediately preceding the reverse stock split. See RCW 23B.13.010. Naturally, Hunt and Blood believed their shares were worth far more, stating that Sentinel C3’s valuation was out of date. Hunt retained his own valuation expert who priced his interest at $426,700. Meanwhile Blood stipulated on his own knowledge that his personal interest was worth $161,075.
As you can see, this case concerns three competing “fair value” appraisals. Which one is the “fair value” and who decides? In Sentinel C3, the court held that the Court, rather than any expert witness, makes the ultimate valuation of “fair value” in a dissenters’ rights action. See Richey & Gilbert Co. v. Nw. Natural Gas Corp., 16 Wash.2d 631, 647-50 (1943). Furthermore, “owner[s] of closely heled shares may testify as to the shares’ value,” but there must be further evidence in support of their valuation. See Sentinel C3, 181 Wash.2d at 142. Lastly, RCW 23B.13.300(5) permits, but does not require, a judge to appoint an appraiser to review Sentinel C3’s share valuation. See Id. In this case, the court held Hunt’s expert valuation was unauthenticated, and deemed Blood’s personal valuation without merit as it lacked evidentiary support of his valuation. The court sided with Sentinel C3’s valuation of Hunt’s interest at $195,200 and Blood’s interest at $48,800.
The Case: Eagleview Technologies v. Pikover
In Eagleview Technologies v. Pikover, Pikover and 37 Technology Ventures LLC dissented to a 50/50 merger of equals between Eagleview Technologies and Pictometry, bringing an action to determine fair value of their shares of common and preferred stock. See Eagleview Technologies, 192 Wash.App. 299 (2015). Eagleview’s appraiser valued the common stock at $2.53 per share, and the preferred stock at $3.89 per share. Pikover and 37 Technology were befuddled because they expected to receive $12 or more per share, because their appraiser valued the shares at $12.14 per share. In response, Eagleview submitted another valuation from a different appraiser valuing the common stock at $3.94 per share, and preferred stock at $4.88 per share. Shortly thereafter, the newly combined company was purchased by Verisk Analytics for roughly $15 per share. The trial court held in favor of Eagleview’s latter appraisal of “fair value.” The Division 1 Court of Appeals affirmed the trial courts holding. See Id.
The court noted that the definition of “fair market value,” as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” IRS Revenue Ruling 59-60. However, the Court of Appeals explained the proper valuation is “fair value” defined under RCW 23B.13.010(3). “[T]he value of the shares immediately before the effective date 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.” As clarified in Sound Infiniti v. Snyder (of which I posted about here), “fair value” is designed to provide dissenters fair and accurate compensation for their shares, recognizing that corporations have both the power and the right to perform such transactions. See Sound Infiniti, Inc. v. Snyder, 169 Wash.2d 199, 210 (2010). When parties offer conflicting evidence on the value of an asset, the trial court may adopt the value asserted by either party, or any value in between. The Delaware Supreme Court has found that it is “entirely proper for the Court of Chancery to adopt any one’s expert’s model, methodology, and mathematical calculations, in toto, if that valuation is supported by credible evidence and withstands a critical judicial analysis.” See M. G. Bancorporation, Inc. v. Le Beau, Del Supr., 737 A.2d 513, 523-26(1999).
Considerations
I tend to refer to the statutory appraisal process to determine “fair value” as a “hoop jumping exercise”. If a practitioner misses one “hoop,” a dissenter loses their right to the appraisal process, or the entity loses its ability to complete the action. While remaining in compliance with the relevant statutes is a challenge, so too is the appraisal process. How can professional appraisers proffer such wildly different conclusions? Alas, appraisal is art packaged as mathematically precise science. Be careful with the process, timing and methods used by an appraiser.
The business lawyers at Beresford Booth have years of experience dealing with actions giving rise to dissenters’ rights and the appraisal process. To learn more, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.