decided: May 4, 1973.
Appeal from judgment of Court of Common Pleas of Lancaster County, Trust Book, No. 41, page 202, in re: Watt & Shand; Appeal of Laura Watt O'Connor.
James P. Coho, for appellant.
Raymond W. Midgett, Jr., with him Kenneth W. Gemmill, John I. Hartman, Jr., Dechert, Price & Rhoads, and Windolph, Burkholder & Hartman, for appellee.
Jones, C. J., Eagen, O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ. Opinion by Mr. Justice Eagen. Mr. Justice Roberts and Mr. Justice Nix concur in the result.
[ 452 Pa. Page 289]
Appellant, Laura Watt O'Connor, is the owner of 813 shares of common stock of Watt & Shand, a Pennsylvania corporation, which operates department stores in Lancaster. At the corporation's annual meeting on April 24, 1969, the majority shareholders amended the articles of incorporation to eliminate cumulative voting. Mrs. O'Connor dissented from the plan and in accordance with the Act of May 5, 1933, P. L. 364, § 515, as amended, 15 P.S. § 1515*fn1 demanded the fair value payment of her shares of stock.
[ 452 Pa. Page 290]
Watt & Shand offered to pay appellant $93.46 per share which was refused.*fn2 The corporation then petitioned the Court of Common Pleas of Lancaster County to determine the fair value of appellant's stock. Exercising its prerogative under the statute,*fn3 the trial court appointed an appraiser to receive evidence and make a recommendation concerning the fair value of the stock. At the close of hearings, the appraiser recommended appellant be paid $84.56 per share. The trial court dismissed appellant's exceptions and adopted the findings of the appraiser. On appeal we vacated the judgment and remanded for a new determination of fair value because the court's acceptance of the appraiser's recommendation was not supported by competent and substantial evidence, which, incidentally, is the compass of our review. O'Connor Appeal, 444 Pa. 206, 283 A.2d 279 (1971).
On remand, counsel for both parties agreed the new determination of fair value should be decided upon the
[ 452 Pa. Page 291]
record previously made. On May 23, 1972, the trial court, without appointing an appraiser, found the fair value to be $102.15 per share and entered judgment for appellant in the amount of $83,047.95, without interest, but with costs (other than all fees and expenses of counsel and expert witnesses) to be paid equally by the parties.*fn4
Two contentions are advanced by this appeal: (1) the trial court again failed to make a proper determination of fair value, and (2) error was committed in refusing to award interest and in failing to impose all costs on the corporation.
For the reasons hereinafter discussed, we remand the case to the trial court for further consideration.
Preliminarily it should be observed that while the term "fair value" is hardly self-executing in its clarity, the object of an appraisal proceeding is to determine the value of the dissenter's shares on a going concern basis. Lowry v. General Waterworks Corp., 26 Pa. D. & C. 2d 154, 159 (1961); Austin v. City Stores Co. (No. 1), 89 Pa. D. & C. 57 (1953).*fn5 In determining what
[ 452 Pa. Page 292]
figure represents this true or intrinsic value, consideration must be given to all factors and elements which reasonably might enter into the fixing of value. As the late Judge Alessandroni wrote in Austin v. City Stores Co. (No. 1), supra, at p. 59: "Some of the factors that must be considered in rendering an intelligent decision are: Asset value; market value; market prices of comparable companies; market price and earnings ratio; management and its policies; earnings; dividends; valuation of assets; reserves for various contingencies; tax liabilities; future earnings; predictions of future business events and etc. The list seems interminable and yet all factors must be considered and given their proper weight in order that a just result might be attained."
In an attempt to render the unwieldy, wieldable, courts have distilled all of these factors into three principal methods of valuation which have been variably used, commonly in combination, in the actual judicial determination of intrinsic value: (1) net asset value; (2) actual market value;*fn6 and (3) investment value.*fn7
[ 452 Pa. Page 293]
Upon remand the trial judge undertook to conduct the appraisal as was his right. His opinion indicates that while he studied closely the valuations of the respective experts who testified, he did not choose to adopt either conclusion, opting instead to work out his own valuation.*fn8 By taking the annual earnings of $11.35, multiplied by 10, or $113.50 less a 10% discount, the trial judge reached a fair value figure of $102.15.
Appellant asserts the court's price earnings ratio is incorrect, claiming that the earnings per share for the year ended January 1969 were $12.93 and not $11.35.*fn9
[ 452 Pa. Page 294]
Appellant apparently does not realize that use of $11.35 inures to her ultimate benefit, else she would not press this claim.
The lower court used but a single year (the year ended January 1969) to obtain the average earnings of Watt & Shand. In our judgment this was error, but since neither party complains of the action, we will not review it.
However, we do point out that in this kind of proceeding "[i]t is best to average earnings over several years to avoid undue emphasis on one exceptionally good or bad recent year." Note, Valuation of Dissenters' Stock under Appraisal Statutes, 79 Harv. L. Rev. 1453, 1464 (1966). The purpose of any average is to balance off extraordinary profits against extraordinary losses, in order that a hypothetical figure of what might be considered the ordinary profit or inherent earning capacity of the business may become discernible.*fn10
[ 452 Pa. Page 295]
If the corporation's earnings are computed over five years*fn11 using $12.93 as the Year I figure, the average obtained is $10.79. If the same operation is performed using $11.90, the five year average is $10.58. The parties and the lower court are wrong in thinking a single year constitutes the average*fn12 and while appellant may be correct that $12.93 represents the true earnings for the year ended January, 1969, she has nonetheless gained $.56 per share by not disturbing the $11.35 figure.
The capitalization ratio used instantly was ten which we feel is within the range of reason.*fn13
[ 452 Pa. Page 296]
Appellant also contends that the determination of fair value was incorrect because the lower court placed little or no significance on the net asset or book value of this stock. As the lower court's opinion noted, the book value on January 25, 1969, was $126 per share and when adjusted for an up-to-date appraisal of the real estate became $141.91 per share.
While net asset value must be given significance, especially in situations where there is no reliable market value for the stock, see, Felder v. Anderson, Clayton & Co., 39 Del. Ch. 76, 159 A.2d 278 (1960), courts must be extremely judicious with respect to the amount of weight assigned this factor. As one authority has pointed out "[t]here is nearly complete agreement that book value does not accurately represent the fair value of the corporate assets." Note, 79 Harv. L. Rev., supra, at 1457. This is so for the reason that the balance sheet usually lists assets at original cost, which may differ greatly from present useable value or the present cost of equivalent assets. Normally, the total assets are worth more than the sum of their parts, because they include qualities useful in the context of a particular business that they would lose if put to different uses. In Borg. v. International Silver Co., 11 F. 2d 147, 152 (2d Cir. 1925), the court cautioned, "The suggestion that the book value of the shares is any measure of their actual value is clearly fallacious. It presupposes, first, that book values can be realized on liquidation, which is practically never the case; and second, that liquidation values are a measure of present values. Every one knows that the value of shares in a commercial or
[ 452 Pa. Page 297]
manufacturing company depends chiefly on what they will earn, on which balance sheets throw little light."
In its opinion the lower court expressed reservation about factoring in a discount in this particular case, a reservation which we share because of the opinion's conclusion that "book value is not inflated but very conservatively stated." We feel a more appropriate weight can be given to net assets by not employing a discount in this situation. Hence, the fair market value of the stock is $113.50.
We also conclude the lower court erred in declining to award appellant interest and costs. At one time Pennsylvania law made no provision for the award of interest and our courts uniformly refused to allow it. See, e.g., Austin v. City Stores Co. (No. 2), 89 Pa. D. & C. 75 (1954). In 1959 certain amendments were added to the Corporation Code which rectified this situation.*fn14
[ 452 Pa. Page 298]
We believe the better view, as well as the intent of the statute, is to allow interest as a matter of course in all cases absent the existence of some inequitable situation. "Since the corporation has had the use of the dissenter's money without his consent from the time he demanded appraisal, it seems that interest is justified." Note, 79 Harv. L. Rev., supra, at 1472.
Despite the fact that the lower court declined to make these awards, there was no explicit finding that Mrs. O'Connor's refusal to accept Watt & Shand's offer was arbitrary, vexatious or not in good faith, nor is there a shred of evidence in the record to support such a finding. The difference between the corporation's offer and the trial judge's undiscounted appraisal is $16,292.52. This figure materially exceeds the amount the corporation offered to pay and, therefore, appellant should also receive reasonable expenses for the employment of experts. Appellant further requests reimbursement for attorney's fees but the statute does not permit it.
The wording of 15 P.S. § 1515 (H) indicates the lower court upon a hearing will determine the proper rate of interest, as well as the costs and expenses of the proceeding and the compensation for experts employed. We do not wish to indicate any view as to how interest should be computed; undoubtedly, there are several techniques, any one of which could be employed. The problem was considered at length in the case of Felder v. Anderson, Clayton & Co., supra, which may be of some assistance. On the question of costs, guidance can be obtained from Lowry v. General Water-Works Corp., 26 Pa. D. & C. 2d 154 (1961), appeal dismissed, 406 Pa. 152, 177 A.2d 82 (1962), where the
[ 452 Pa. Page 299]
court allowed record costs, fees of expert witnesses and costs of service, but disallowed the cost of copies of the notes of testimony, of multilithing briefs or of photostats, saying that these latter expenses were incurred for the convenience of the plaintiff and were not contemplated by the Corporation Code.*fn15
Judgment vacated, and the record is remanded for any further proceeding necessary for the entry of a judgment conforming to this opinion.
Judgment vacated and record remanded.