Dissenter Rights Procedure

Dissenter Rights Procedure

      In Peter Mahler’s blog New York Business Divorce, Franklin C. McRoberts has posted a summary of the requirements applicable, under New York corporation law, for the prosecution of a dissenter rights action. Why your state may not follow the exact same procedure, this posting provides a useful outline of what you need to look for under the laws of other jurisdictions.

      That posting, entitled How to Initiate a Fair Value Appraisal Proceeding as a Dissenter’s Checklist, is available at the following link: HERE IS A LINK.

Kentucky, and Not Federal, Court to Hear Dissenter Rights Action

Kentucky, and Not Federal, Court to Hear Dissenter Rights Action

A recent decision from the federal district court held that, on the basis of “Burford Abstention,” an action arising under the dissenter rights statute should be heard in state, not federal, court. Henley Mining, Inc. v. Parton, Civ. No. 6:17-CV-00092-GFVT, 2018 WL 1526081 (E. D. Ky March 28, 2018).

In connection with the merger of several companies in which he was a shareholder, David Parton exercised dissenter rights in accordance with the dissenter-rights provisions of the Kentucky Business Corporation Act. The successor corporation paid to Parton what it thought was the amount due; Parton disagreed with that amount. In response thereto, and again consistent with the Kentucky Business Corporation Act, the corporation filed a complaint with the court seeking a determination of the fair value of Parton’s interest. This suit was filed in federal court on the basis of diversity jurisdiction, Parton being a citizen of Virginia while Henley Mining, the successor corporation, was incorporated (and presumably has its principal place of business) in Kentucky.

Henley asked that the action be dismissed on the basis of Burford Abstention, essentially an argument that, notwithstanding the fact that the federal court has jurisdiction, it should decline to exercise it because the matter in controversy is particular to the competency of state courts.

Citing Caudill v. Eubanks Farms, Inc., 301 F.3d 658, 659 (6^th Cir. 2002), it was observed that:

A corporation is “itself a creature of state law” and, specifically, “The Kentucky Legislature has enacted a comprehensive legislative scheme to govern businesses which elect to incorporate in the state.”

Finding that the question presented with respect to dissenter rights is “a difficult question of state law bearing on policy concerns,” the action was dismissed without prejudice so that it may be re-filed in state court.

Enforceability of Non-Competition Limitations Against Shareholder Who Dissents From Merger

Enforceability of Non-Competition Limitations Against Shareholder Who Dissents From Merger

A recent decision from Colorado considered and rejected the enforceability of non-competition limitations entered into by an anesthesiologist shareholder who dissented when his practice merged into a larger practice. Crocker v. Greater Colorado Anesthesia, P.C., No. 17CA0099, 2018 COA 33 (Colo. App. March 8, 2018).

Peter Mahler in his blog New York Business Divorce, provides an excellent review of this decision. HERE IS A LINK to that discussion.

New York Court Denies Marketability Discount in Dissenter Rights Action

New York Court Denies Marketability Discount in Dissenter Rights Action

 

      In the original decision in this dissenter right action, it having been delivered on October 6, 2014, the court determined that a discount for lack of marketability would not be applied to the sharers held by the dissenters, it being determined that the application of such a discount would be equivalent to imposing a minority interest discount, that already forbidden by New York law.

 

      Ruling on December 22 in connection with a motion for reconsideration, the judge again I determined that a discount for lack of marketability is not, at least in this instance, appropriate. Zelouf International Corp. v. Zelouf, Index 653652/2013 (Dec. 22, 2014).  Peter Mahler, in his blog New York Business Divorce, has reviewed these developments; his discussion can be accessed THROUGH THIS LINK.

Kentucky has already moved its law ahead of that in New York with respect to minority and lack of marketability discounts in dissenter rights actions. In Shawnee Telecom Resources, Inc. v Brown, 354 S.W.3d 542 (Ky. 2011), the Kentucky Supreme Court reversed Ford v. Courier-Journal Printing Co. and held that, in the context of a dissenter rights action, neither a minority nor a lack of marketability discount should be applied with respect to the shares of the dissenting shareholder.

Ky S. Ct. Holds No Minority Discounts in Dissenter Rights Valuations

Kentucky Joins the Modern Rule Against

Marketability Discounts in Dissenter Rights Actions

     Since 1982, Kentucky law has supported the position that a discount for minority may be applied in determining the “fair value” of shares held by a dissenting shareholder.  Ford v. Courier-Journal Job Printing Co., Inc., 639 S.W.2d 553 (Ky. App. 1982).  The tide began to turn against that analytic path over 2009-2010 wherein a pair of opinions from the Court of Appeals rejected discounts, requiring rather that the dissenting shareholder receive their full pro-rata value of the corporation as a going concern.  Brooks v. Brooks Furniture Mfgrs., Inc., 325 S.W.3d 904 (Ky. App. 2010); Shawnee Telecom v. Brown, No. 2008-CA-00042-MR & No. 2008-CA-000167-MR, 2009 WL 2475269 (Ky. App. Aug. 14, 2009) (not to be published).  While the Ford opinion may as of its time have been consistent with then accepted views, it has fallen victim to time as a broad range of statutes, courts and commentators have come to the view that permitting minority discounts to be imposed on dissenting shareholders provides an opportunity for windfall to the controlling shareholders.  See Thomas E. Rutledge and David Lester, Fair Value With or Without Discounts:  Are the Rules Changing in Dissenter Rights Actions?  6 The Kentucky CPA Journal 28 (2010).

     On October 27, the Kentucky Supreme Court has brought Kentucky law current with the now broadly accepted standard as to valuation in a dissenter rights action, decisively rejecting minority discounts.  Shawnee Telecom v. Kathy Brown, No. 2009-SC-000574-DG (Ky. Oct. 27, 2011).

     Writing in the context of a dissenter rights action, the Kentucky Supreme Court wrote that:

[W]e conclude that “fair value” is the shareholder’s proportionate interest in the value of the company as a whole and as a going concern…. As for applying a marketability discount when valuing the dissenter’s shares, we join the majority of jurisdictions which, as a matter of law, reject this shareholder level discount because it is premised on fair market value principles which overlook the primary purpose of the dissenter’s appraisal rights – the right to receive the value of their stock in the company as a going concern, not its value at a hypothetical sale to a corporate outsider.   Slip op. at 2.

     In the course of the opinion, the court expressly addressed the prior Ford decision, writing that it “does not accurately address ‘fair value’ and should be overruled in its entirely.”  Slip op. at 18.  Continuing in the same vein, the Supreme Court wrote:

We hold, in sum, that in a KRS 271B.13 appraisal proceeding the dissenting shareholder is entitled to the fair value of his or her shares as measured by the proportionate interest those shares represent in the value of the company as a going concern, a value determined in accord with the general accepted valuation concepts and techniques and without shareholder–level discounts for lack of control or marketability.  Slip op. at 33.

And as well observed:

Once the entire company has been valued as a going concern, however, by applying an appraisal technique that passes judicial muster, the dissenting shareholder’s interest may not be discounted to reflect either a lack of control or a lack of marketability.   Slip op. at 44.

Net Asset Value is a Viable Methodology

     In the Shawnee case, Brown, the dissenting shareholder, asserted that net asset value should not have been utilized in determining the company’s value, a view in turn approved by the Kentucky Court of Appeals.  The Kentucky Supreme Court did not, however, agree with that assessment.  Rather, it wrote that net asset value is an accepted approach to business valuation that may be utilized by an appraiser to establish the market value of the subject company.  Slip op. at 37.  The important point is, however, that the net asset value must be used as part of an approach to determine the market value of a company on a going concern basis and not merely the liquidation value of its tangible assets.  Slip op. at 38, footnote 8.

Entity Level Discounts Remain Possible

     The Court held that entity level discounts, based upon the particular facts and authorities applicable to the specific company under consideration, may be appropriate.  For example, the court acknowledged that it may be appropriate to apply a marketability discount to determine the value of the company as contrasted with the value of an otherwise similar publicly traded venture.  The Court listed other entity level discounts that may, in a particular circumstance, be appropriate as including the key manager,  limited customer/supplier base, “trapped-in” capital gains, environmental liabilities, pending litigation, portfolio and a small size.  Slip op. at 40.  On these points, the Court cited Business Valuation Discounts and Premiums by Shannon D. Pratt. 

Valuation Remains an Art

       The proper weighting of the market, the net asset value and capitalized earnings as well as other appropriate is a question within the expertise of the valuation professional retained on the engagement.  While minority discounts, at the shareholder level, may no longer be appropriate, the full range of the art of valuation otherwise remains viable in dissenter rights actions.

This Decision Addresses Valuation in the Context of a Dissenters Rights Case and Not Otherwise

      The Supreme Court made clear there may exist different standards for valuation to be applied in different circumstances.  It did this in face of assertions by Shawnee and the Kentucky Chamber of Commerce (it filed an amicus brief in this case) to the effect that the “fair value” standard of the dissenter rights cases should be applied consistently with the fair market standards applied in marital dissolution and tax cases.  The Court rejected that suggestion, noting that the dissenter rights statute has a particular purpose, namely protecting the economic interest of the minority shareholders, and for that purpose fair value was used in place of market value.  Hence, the use of various discount factors to determine fair market value in other contexts is not impaired by this ruling.  Slip op. at 36.

Thomas E. Rutledge & R. David Lester

Ky S.Ct. Rejects Minority Discounts in Dissenter Rights

Kentucky Supreme Court Rejects Minority Discount in Dissenter

Rights Actions – Shawnee Telecom v. Kathy Brown

            This morning, in Shawnee Telecom v. Kathy Brown, 2009-SC-00574-DG (Oct. 27, 2011), the Kentucky Supreme Court expressly overturned Ford v. Courier-Journal Job Printing Co. and minority discounts in the valuation of the shares of a dissenting shareholder.  Rather, the corporation is to be valued as a whole on a going concern basis, and the shareholder is entitled to their proportionate interest in that total value.

            A detailed analysis of this decision will follow in a day or two, but until then it should be noted that this is an exceptionally well researched and written opinion.  The Court traced the development of dissenter rights and as well traced the history of the circumstances in which they are typically employed, namely squeeze out and similar transactions.  However, even as the Court cited many law review articles on these topics, they failed to reference that of Professor Rutheford B. “Biff” Campbell, Jr., Corporate Fiduciary Duties in Kentucky, 93 Ky. L J. 551, 602-11 ((2004-05).  He had argued against both the Delaware Block Method of valuation and minority discounts, both positions adopted today by the Supreme Court. 

Upcoming from the Kentucky Supreme Court - Valuation in Dissenter Rights Actions

Upcoming from the Kentucky Supreme Court -

Valuation in Dissenter Rights Actions

Shawnee Telecom, Inc. v Kathy Brown, 2009-SC-000574-DG, was argued to the Supreme Court on April 13, 2011.  This case will provide guidance on whether or not a marketability discount may be applied in valuing the shares of a dissenting shareholder.

In Ford v. Courier-Journal Job Printing Co., Inc., 639 S.W.2d 553 (Ky. App. 1982), the Court permitted a 25% discount on the shares held by a dissenter from a sale of substantial (but not all) corporate assets.  No published decision again reviewed the point until 2009.

That case was Shawnee Telecom, Inc. v. Kathy Brown, 2009 WL 2475269 (Ky. App. 2009).  In this opinion, designated “Not to be Published,” the Court of Appeals reversed the trial court for permitting a 25% discount of Brown’s shares, she having dissented from the terms of a squeeze out merger.  Quoting a decision of the Delaware Supreme Count, the Court of Appeals wrote:

To fail to accord to a minority shareholder the full proportionate value of his shares imposes a penalty for lack of control, and unfairly enriches the majority shareholders.

After the Court of Appeals’ ruling in Shawnee Telecom, an en banc decision of the Court of Appeals expressly overruled the Ford decision.  Brooks v. Brooks Furniture Mfgrs., Inc., 325 S.W.3d 904 (2010).

The Brooks case, like Shawnee Telecom, involved a squeeze merger.  Curiously, it was Shawnee Telecom, an unpublished and unanimous decision of the Court of Appeals, and not the published en banc ruling in Brooks from which there was a dissent, that was appealed to the Kentucky Supreme Court.  Likewise it is curious that it is the rather more cursory Shawnee Telecom decision, as contrasted with the significantly more in-depth analysis in the Brooks opinion, that comes before the high court.