Tennessee no longer mandates Delaware block method to determine fair value

Athlon Sports Communications, Inc. v. Duggan, 2018 Tenn. LEXIS 310 (June 8, 2018) (Athlon II)

For the longest time, Tennessee case law required trial courts presiding over dissenting shareholder actions to determine fair value by using the Delaware block method (DBM). At the same time, Delaware and a number of other jurisdictions have long found the DBM too limiting and favored more forward-looking valuation methods, including the discounted cash flow analysis. In a key ruling, the Tennessee Supreme Court recently joined their ranks.

The impetus for this change in law was a shareholder dispute involving a Nashville-based, closely held media company that focused on sports reporting and sold sports memorabilia. Both parties’ trial experts agreed that, under Tennessee case law, they had to value the dissenting shareholders’ stock under the DBM. However, both experts also employed “more modern approaches,” i.e., they performed a discounted cash flow analysis. The plaintiff company’s expert concluded the value of the company was zero no matter the valuation method. In contrast, the dissenting shareholders’ expert performed a DCF analysis that achieved a substantially higher value.

The trial court's language as to methodology was slightly ambiguous. On the one hand, the court stated: “Tennessee uses the Delaware Block method to determine fair value for dissenters.” On the other hand, it said that, under Tennessee law, “the ultimate value of the stock is not formulaic.” 

The dissenting shareholders unsuccessfully challenged the trial court ruling at the Court of Appeals. However, the state Supreme Court was receptive to their argument that the DBM was outdated and ill-suited to capture the value of a company that, like the subject company, was in the midst of a turnaround.

Read more about the Tennessee Supreme Court’s analysis here.