Appeal from the Decree of June 30, 1987, in the Court of Common Pleas of Cambria County, Civil Division, at No. 1986-1525
Edward G. O'Connor, Pittsburgh, for appellant in no. 1052 and appellee in no. 92.
Cirillo, President Judge, and Beck, and Popovich, JJ. Popovich, J. files a dissenting statement.
[ 382 Pa. Super. Page 181]
This is an appeal and cross-appeal from a trial court determination of the fair value of the common stock of appellant/cross-appellee Glosser Bros., Inc. (the "Company"). The impetus for the trial court's valuation was a petition by the Company for a determination of the fair value to be paid to appellees/cross-appellants, shareholders of the Company who dissented from a management sponsored leveraged buy-out and merger of the Company pursuant to Section 515 of the Business Corporations Law. 15 Pa.Stat.Ann. § 1515 (1967 & Supp.1988).
The Company is a Pennsylvania corporation with its principal office and headquarters in Johnstown, Pennsylvania. It operated a chain of 24 discount department stores, 40 outlet stores, a conventional department store and a chain
[ 382 Pa. Super. Page 182]
of supermarkets. At the time relevant to this appeal, 2,269,000 shares of the Company's common stock were issued and outstanding. The stock was listed on the American Stock Exchange. Fifty to sixty percent (50-60%) of the stock was closely held by management and members of the Glosser family. The remainder was publicly traded. In the six months prior to the announcement of the instant transaction (the merger), the stock traded at an average rate of approximately 30,000 to 40,000 shares per month and at an average price of $14.00 per share. In the two years prior to the merger, the average monthly trading volume was slightly higher, but the average trading price was substantially the same. In the three years prior to the merger, the market price of the stock never exceeded $19.00.
On January 28, 1985, the Company announced a proposed merger whereby all of the common stock of the Company would be acquired in exchange for a cash payment to the shareholders of $20 per share. The goal of the transaction was apparently to shift control of the Company to a small management group. This group, working with the New York investment firm of Bear Stearns & Co., formed B.S. Holding Corporation, now Gee Bee Holding, which in turn formed a wholly owned subsidiary called B.S. Acquisition Corp. The latter corporation made the offer for the buy-out of the Company's stock and proposed to merge with the Company. The proposed merger was approved by the vote of a substantial majority of the shareholders at a meeting held on September 12, 1985 and the merger became effective on October 11, 1985. Thus, the net result was that B.S. Acquisition Corp. was the survivor of the merger and now owns the Company's business. B.S. Acquisition is wholly owned by Gee Bee Holding, which in turn is controlled by the former management group of the Company.
Appellees/cross-appellants are three dissenting shareholders, namely, Morton Glosser, W.S. Wurzburger and Mr. Wurzburger's wholly owned corporation, Wurzburger, Morrow & Keough, Inc. They refused to accede to the proposed merger, contending that the $20 per share price that
[ 382 Pa. Super. Page 183]
B.S. Acquisition offered for their stock did not represent the fair value thereof. Therefore, as required by Section 515, the Company instituted this action for an appraisal of the stock. The Company's petition named Morton Glosser as a dissenter, but did not name Mr. Wurzburger or his corporation. Mr. Wurzburger and his corporation petitioned to intervene, and their petition was granted.*fn1
The trial court did not appoint an appraiser, but rather conducted a several day trial without jury consisting mainly of expert testimony regarding a variety of methods of determining the fair value of the stock. The trial court ultimately determined that the fair value of the stock should be fixed at $31.00 per share and assessed interest at the rate of eight percent (8%) from the date of the merger. The trial court arrived at this value by assigning sixty-five percent weight (65%) to what it determined to be the asset value of the stock and thirty-five percent (35%) weight to what it determined to be the investment value of the stock. The court gave no weight to the stock's market value as determined by the price at which it traded on the American Stock Exchange.
The Company challenges the trial court's valuation on several grounds, only one of which we find to have merit. We will nevertheless address all of the Company's properly preserved objections to the valuation for the purpose of guiding the trial court on remand.
[ 382 Pa. Super. Page 184]
Initially we note that our scope of review in an appeal from a trial court determination of value under Section 515 has been clearly defined in our case law. In In re Jones & Page 184} Laughlin Steel Corp., 328 Pa. Super. 442, 477 A.2d 527 (1984), we described our scope of review as follows:
We first look to the case of Appeal of O'Connor, 444 Pa. 206, 283 A.2d 279 (1971) in order to determine our scope of review . . . . the [ O'Connor ] court stated:
Our review of this appeal encompasses only an ascertainment of whether the findings of the trial court are supported by competent and substantial evidence. We reject appellant's request that we make an independent determination as to the fair value of her shares: 'This court does not sit as a trier of issues of fact expecting to be persuaded that one or the other side is more credible. That is only a task for the trial court and we would never invade that area of the judicial process.' (Footnotes and citations omitted).
Appeal of O'Connor, supra, 283 A.2d at 280.
The O'Connor court further noted that substantial evidence is more than a scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.
Id. 328 Pa. Super. at 457-58, 477 A.2d at 534-35. See also O'Connor Appeal, 452 Pa. 287, 304 A.2d 694 (1973); Note, Corporations -- Fair Value for Dissenting Shareholders Under the Pennsylvania Appraisal Statute, 78 Dick.L.Rev. 582 (1974).
In recognition of our limited scope of review, we too will refrain from making an independent determination of the value of the Company's stock. Thus, although the Company's allegations of error as to valuation, particularly as stated in its post-trial motions, are at points no more than generalized attacks on the trial court's decision, we will address only those issues that were both specifically preserved in the trial court and properly presented to this court.
B. Relevance of Market Value
One of the Company's strongest objections to the trial court's valuation centers on the trial court's refusal to
[ 382 Pa. Super. Page 185]
assign any weight to the market value of the stock. We agree that this was error.
The leading Pennsylvania case defining the methodology for valuing stock in a Section 515 proceeding is the second O'Connor Appeal, decided by the Supreme Court in 1973. O'Connor Appeal, 452 Pa. 287, 304 A.2d 694 (1973). There, the Supreme Court instructed that fair value is to be construed as going concern value, as contrasted with liquidation value. The court noted that there is a potentially endless list of factors that are considered relevant to this value. The "going concern" concept of fair value in a dissenting shareholders' appraisal proceeding and the many individual factors comprising it were aptly described by the Delaware Supreme Court in Tri-Continental Corp. v. Battye, Del., 74 A.2d 71, 76 (1950):
The basic concept of value under the appraisal is that the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern. By value of the stockholder's proportionate interest in the corporate enterprise is meant the true or intrinsic value of his stock which has been taken by the merger. In determining what figure represents this true or intrinsic value, the appraiser and the courts must take into consideration all factors and elements which might reasonably enter into the fixing of value. Thus, market value, asset value, dividends, earning prospects, the nature of the enterprise and any other facts which were known or which could be ascertained as of the date of the merger and which throw any light on future prospects of the merged corporation are not only pertinent to any inquiry as to the value of the dissenting stockholders' interest, but must be considered by the agency fixing the value.
The O'Connor court noted that courts had properly distilled all of these factors into three principal valuation methods, i.e. (1) net asset value; (2) actual market value;
[ 382 Pa. Super. Page 186]
and (3) investment value. The court defined these valuation methods as follows:
Net Asset Value is the share which the stock represents in the value of the net assets of the corporation. Such assets include every kind of property and value, whether realty or personalty, tangible and intangible, including good will and the corporation's value as a going concern. Investment Value is an estimate of present worth in light of past, present and prospective financial records of the company and is obtained by capitalizing earnings. There are two basic steps in the capitalization process: calculation of a representative annual earnings figure, and choice of a capitalization ratio which reflects the stability and predictability of earnings of the particular corporation.
Market Value refers to the price at which the stock was selling on the market prior to the action which is objected to, disregarding any change in price due to the action.
O'Connor, 452 Pa. at 292-93 n. 7, 304 A.2d at 698 n. 7.
However, we do not read the O'Connor opinion as limiting a trial court to a consideration of only these three valuation methods. Id., 452 Pa. at 291-92, 304 A.2d at 697-98. Financial analysis has become increasingly complex with the passage of time. New methods of valuing investments have been developed and are generally accepted in the financial community as being reliable. In recognition of this fact, other jurisdictions that previously restricted a trial court to the foregoing three valuation methods have now expanded the types of valuation information that may be considered in a stock valuation proceeding. For example, in Weinberger v. UOP, Inc., 457 A.2d 701 (Del.1983), the Supreme Court of Delaware, known for its expertise in these matters, directed that Delaware courts would no longer be bound to use only the traditional "Delaware block" or weighted average approach to valuation. By this method, which is still generally in use in Pennsylvania and which was applied by the trial court in the instant case, the court considers only the three traditional methods of valuation,
[ 382 Pa. Super. Page 187]
assigns each a percentage weight and adds the resulting amounts to come to a total value. The Weinberger court found this approach too restrictive and directed that courts henceforth use a "more liberal approach [which] must include proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court . . . ." Id. at 712-13.
Although we do not question the reliability of the three traditional methods of valuation, we do recognize that they are not the exclusive methods to be used in determining going concern value. We approve of the Weinberger approach to valuation. Such a broader attitude not only comports with the O'Connor court's recognition that all factors relevant to value should be considered, but will also serve to assist trial courts greatly in their difficult valuation task by allowing them to consider a broader and perhaps more sophisticated range of information.
Against this backdrop, we consider the more specific question of the relevance of market value to a determination of the fair value of stock in the context of a Section 515 proceeding. The relevance of this indicia of value has been aptly described by the Court of Chancery of Delaware as follows:
It is, of course, axiomatic that if there is an established market for shares of a corporation the market value of such shares must be taken into consideration in an appraisal of their intrinsic value. And if there is no reliable established market value for the shares a reconstructed market value, if one can be made, must be given consideration. It is, of course, equally axiomatic that market value, either actual or constructed, is not the sole element to be taken into consideration in the appraisal of stock.
Application of Delaware Racing Association, 42 Del.Ch. 406, 213 A.2d 203, 211 (1965). See also Henn, H. and Alexander, J., Law of Corporations § 349 at 1002-03 (3d ed. 1983) ("In situations where there is a reliable market value, such value is, in many jurisdictions, presumptively
[ 382 Pa. Super. Page 188]
controlling; in other jurisdictions, market value is only one factor to be considered . . . Of course, when there is no readily-ascertainable market value, various alternative indicia of value must be considered and weighted . . .").
Thus, market value is relevant to a determination of the true intrinsic value of stock on a going concern basis whenever it is reliable, i.e. whenever it represents the amount that a willing buyer is willing to pay for the stock and the amount for which a willing seller is willing to sell the stock in an open and free market.*fn2 Market value becomes less relevant as its reliability decreases and may in fact properly be deemed irrelevant where it provides no reliable information as to the true value of the stock.
Pennsylvania cases are in accord with this view. In O'Connor itself, the Supreme Court found that although market value may generally be relevant, the market value of the stock at issue provided no guidance as to true value. The Court stated:
This case presents an instance where a certain method of valuation has no applicability whatever . . . . [the company] is a closely-held family corporation having unlisted stock and therefore, no public market. Shares are sold too infrequently for market value to play any part in these proceedings . . .
Id. 452 Pa. at 292 n. 6, 304 A.2d ...