In a key valuation decision, the Tennessee Supreme Court recently overruled precedent on how to determine fair value in a dissenting shareholder suit. Valuators are no longer required to use the Delaware block method (DBM), the high court said, opening the door for techniques that incorporate projections of future value.
Restriction lifted: In a shareholder dispute involving a Nashville-based, closely held media company that focused on sports reporting and sold sports memorabilia, both parties’ trial experts noted that, under Tennessee case law, they had to use the Delaware block method to value the dissenting shareholders’ stock. However, both experts also employed “more modern approaches,” i.e., forward-looking methods, such as the discounted cash flow analysis. The plaintiff company’s expert determined that the value of the company was zero under either the DBM or alternative valuation methods. He described the company as being in a “zone of insolvency” at the time of the merger. The DCF method was “not practical, useful, or reliable when projections of future results cannot be made without resorting to undue speculation,” as was the case here, he explained.
In contrast, the dissenting shareholders’ expert noted the Delaware block method was “not currently a common valuation method.” However, he performed a DBM-based valuation that achieved a $6.48-per-share value. He also performed two DCF analyses using different projections that achieved a value of $6.48 per share and $22.32 per share.
The trial court credited the testimony of the company’s expert but increased the value to 10 cents per share. It noted: “Tennessee uses the Delaware Block method to determine fair value for dissenters.” But the court also said that, under Tennessee law, “the ultimate value of the stock is not formulaic.” The Court of Appeals found the trial court’s use of the DBM properly followed precedent.
On review, the Tennessee Supreme Court noted the Delaware courts, as well as numerous other courts, long have adopted a “more open approach,” which allows valuators and adjudicators to consider a merged company’s future prospects. “We see no reason to restrict trial courts to using only the Delaware Block method in determining fair value,” the Tennessee high court said. The DBM “remains available where appropriate, but trial courts may now choose to use another valuation method to determine the fair value of a dissenting shareholder’s shares of stock.”
The trial court’s remarks in the instant case left it unclear whether the court had felt bound to use the DBM or, in fact, had based its rejection of the defense expert’s DCF analyses on the facts of the case, the high court said. In remanding, the Supreme Court asked the trial court to reevaluate its decision under the new ruling.
A digest of Athlon Sports Communications, Inc. v. Duggan, 2018 Tenn. LEXIS 310 (June 8, 2018) (Athlon II), and the Supreme Court’s opinion are available at BVLaw. Subscribers can also find a digest of Athlon Sports Communications, Inc. v. Duggan, 2016 Tenn. App. LEXIS 773 (Oct. 17, 2016), and the appeals court opinion.