Summary 2006 WY 107

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Case Name: Brown v. Arp and Hammond Hardware Co.

Citation: 2006 WY 107

Docket Number: 05-70

Appeal from the District Court of Laramie County, Honorable Nicholas G. Kalokathis, Judge

Representing Appellants (Defendants): Scott W. Meier, of Hickey & Evans, Cheyenne, Wyoming

Representing Appellee (Plaintiff): John B. "Jack" Speight & Robert T. McCue, of Speight, McCue & Associates, Cheyenne, Wyoming; Amanda Hunkins Newton, of Jones, Jones, Vines & Hunkins, Wheatland, Wyoming

Date of Decision: August 29, 2006

Issues: Whether the District Court erred when, under the Wyoming dissenters' rights statute, it applied a discount for hypothetical trapped-in capital gains in determining the fair value of Appellants' interest in Appellee Company. Whether the District Court erred when, under Wyoming dissenters' rights statute, it applied a lack of control discount (also known as a minority interest discount) in determining the fair value of Appellants' interest in Appellee Company. Whether the District Court committed clear error when, in its Findings of Fact, it failed to include the value of non-ranch assets in determining the fair value of Appellee Company as an entity, and thus undervalued the fair value of Appellants' interest.

Holdings: A minority discount may not be applied in determining the fair value of a dissenting shareholder's interest. The fair value in Wyo. Stat. 17-16-1301(a)(iv) must not include a minority discount in order to be consistent with the purpose served by the dissenters' rights statutes. The dissenters' rights statute serves as the primary assurance that minority shareholders will be properly compensated for the involuntary loss of their investment. The remedy protects the minority shareholders ex ante, by deterring majority shareholders from engaging in wrongful transactions, and ex post, by providing adequate compensation to minority shareholders. While it is true that dissenters' rights are equitable in nature, equity does not afford the district court discretion to offend the purpose of the statute. The remedy provided to a minority shareholder was not designed to encourage majority shareholder oppression. To include a minority discount would simply penalize the dissenting shareholder while allowing the corporation to buy his shares cheaply. That is not the protection that the legislature had in mind. Thus, in a dissenters' rights appraisal, the focus of the valuation is not the stock as a commodity, but rather the stock only as it represents a proportionate part of the enterprise as a whole. To find fair value, the trial court must determine the best price a single buyer could reasonably be expected to pay for the corporation as an entirety and prorate this value equally among all shares of its common stock. Under this method, all shares of the corporation have the same fair value. Accordingly, the fair value of Appellants' shares should not have been adversely impacted by Appellants' status as minority shareholders. The district court erroneously applied a 30% minority discount. Appellants are entitled to a modified judgment reflecting the district court's determination of their proportionate value of the corporation without the minority discount.

The 5% discount applied by the district court does not result in fair value pursuant to Wyo. Stat. 17-16-1301(a)(iv). The fair value of Appellants' shares is measured immediately before the effectuation 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. This language generally excludes costs that may be incurred after effectuation of the corporate action causing the shareholder to dissent, and such costs should not be assessed against the dissenting shareholders. The purpose of the remedy given to dissenting shareholders is to compensate them for the fair value of their shares. The process is designed to arrive at a value based upon what the shareholder is forced to give up as a result of the transaction triggering the right to dissent. Based upon that purpose, neither immediate tax consequences nor deferred tax consequences of the triggering transaction should be considered in determining the fair value of dissenters' shares. To consider such tax consequences would not only violate the clear language of the statute, but also charge dissenting shareholders with taxes which would not accrue but for the transaction itself or taxes which may never accrue. When a court is valuing the assets of a corporation as a part of valuing the corporation as a whole, tax effects should be considered only in the most limited circumstances. Such tax consequences should be considered only when a sale of those assets is imminent and unrelated to the transaction which triggered the shareholders' right to dissent. Additionally, Appellee did not present evidence to support its assertion that a judgment favoring Appellants would force a sale of corporate assets. There was no evidence identifying the property that might be sold, the date of sale, or the taxable basis for the property. In the absence of specific facts about a prospective sale, it would be the basest form of speculation to attempt to determine tax consequences of a voluntary liquidation of assets at an unknown future time. Thus, under the circumstances of this case, a discount for trapped-in capital gains taxes should not have been a consideration in the fair value of Appellants' shares because it was premised upon action contemplated by the corporation subsequent to (or because of) the reverse stock split. Additionally, the district court lacked an evidentiary basis to calculate the discount when the nature, timing, and details of a sale were speculative. Application of the 5% discount for trapped-in capital gains was erroneous.

In determining the corporation's value, several other corporate assets were not mentioned in the district court's findings of fact and conclusions of law. Appellants contend the district court should have included them in its fair value determination. Appellee contends that Appellants had an opportunity to bring the omission to the attention of the district court, and failing to do so, should be precluded from raising this issue on appeal.

Prior to trial, the parties stipulated that the corporation owned these assets but the value of this property was not stated. Appellants submitted proposed findings of fact to the district court that pertained to the value of these assets. Although they were not specifically listed or identified in Appellants' proposed findings, the difference between the value figures stated by the parties suggests that assets additional to those ultimately used by the district court were involved. Similarly, the same two values were introduced at trial as exhibits supporting Appellants' proposal for valuing of the corporation. The district court's failure to incorporate these values into its determination of fair value was clearly erroneous. The nature of the other assets totaling is not apparent from the record, and to the extent those assets are not in dispute, that value should also be included.

In a dissenters' rights action pursuant to Wyo. Stat. 17-16-1301, et seq., "fair value" of a minority shareholder's interest may not be discounted for minority status. The district court erred by applying a minority discount. The district court also erred by applying a discount for trapped-in capital gains because it was based upon potential corporate action after the date of valuation for determining fair value under Wyo. Stat. 17-16-1301(a)(iv) and it was not supported by evidence. Finally, the district court erred in omitting corporate assets from its calculation of fair value.

The judgment is reversed, and we remand this matter to the district court for further proceedings consistent with this opinion.

J. Burke delivered the opinion for the court.