The Delaware block method is obsolete, dissenting shareholders in a Tennessee fair value case argued. They asked the appeals court to strike down the lower court’s DBM-based fair value determination and went as far as proposing a change in valuation law. Their efforts fizzled.
Focus on past performance: At issue was the value of a Nashville-based, closely held media enterprise that suffered a serious decline in revenue during the 2008 recession. In 2010, an investor approached the company proposing a $1.5 million investment and presenting a turnaround plan. Besides buying into the company, he assumed the roles of president and CEO. When the company’s situation did not improve, he was asked to step down. Later, the majority shareholders proposed a merger, buying out the minority shareholders for $0.10 per share. The minority shareholders, including the investor, rejected the offer, arguing their shares were worth $6.19 per share. The controlling shareholders asked the court for a judicial appraisal.
The trial court followed case law and applied DBM, which uses the three primary valuation methods (market, asset, and income approaches) and weights their results considering the facts of the case (type of business, primary purposes of business, established market). The court adopted the $0.10-per-share price the controllers proposed.
On appeal, the dissenting shareholders contended it was time to abandon DBM. With its rigid focus on past performance and disregard for prospective performance, this approach was “ill-suited” to valuing a company undergoing a turnaround. In fact, the dissenters said, courts in Delaware have long adopted a more liberal approach that allows valuation by any technique that is acceptable in the valuation and financial professions and is admissible in court.
In response, the Tennessee Court of Appeals noted a change in Delaware case law did not translate into a change in Tennessee law. Precedent in Tennessee prescribes the use of DBM. The trial court used the correct valuation method, and it applied the method correctly, the appeals court found. As for changing the law on valuation, “it is the Tennessee Supreme Court that will have to do it and not this Court,” the appeals court said. The $0.10-per-share price represented fair value, the appeals court affirmed.
The case is Athlon Sports Communications, Inc. v. Duggan, 2016 Tenn. App. LEXIS 773 (Oct. 17, 2016). A digest and the court’s opinion are available at BVLaw.
Extra: You can get a rundown of the latest valuation-related court cases during the BVLaw Case Update: A One-Hour Briefing on February 7 with R. James Alerding (Alerding Consulting LLC) and Sylvia Golden (Business Valuation Resources).