Earlier this year, a State Court in Delaware determined the value of a minority shareholder’s shares which was in dispute. The unpublished opinion, In re Sunbelt Beverage Corp. Shareholder Litigation, 2010 WL 26539 (Del.Ch. Jan 05, 2010) (No. Civ. A. 16089-CC), reconsiderationden., In re Sunbelt Beverage Corp. S’holder Litig., 2010 WL 692400 (Del.Ch. Feb 15, 2010) (NO. CIV.A. 16089-CC) was brought by Jane Goldring, a “former minority shareholder in [a] beverage corporation, who had been forced out of [the]corporation as result of [a] cash-out merger of a former corporation into beverage corporation. [The shareholder] filed suit against individual members of [the] beverage corporation’s board of directors, alleging breach of fiduciary duty, and seeking [rescission] or, the alternative, an appraisal of fair value of her shares as of merger date.” Id. at 1.
The Court analyzed the different ways a minority shareholder’s interest can be evaluated for purposes of determining the value the shareholder should be paid, whether in the form of a sales price or damages. The Court rejected a number of approaches, but ultimately used a discounted cash flow calculation to arrive at the compensation the minority shareholder should receive.
Importantly, the Court then granted her an additional award of court costs, such as expert witness fees, but refused to provide her with reimbursement of her attorneys fees. The reason the Court refused to award attorneys fees was based on a lack of bad faith on the part of the defendants. The Court reasoned that although the defendants’ “WPG Formula” for valuation of the shares was rejected by the Court, it was not submitted in bad faith.
“I agree with defendants’ analysis on the issue of shifting attorney fees: “to constitute bad faith [and thus warrant shifting of attorney fees contrary to the American Rule], the defendants’ action must rise to a high level of egregiousness.” Here, I cannot find defendants’ actions to be of the egregious, vexatious, or bad-faith sort that have merited the shifting of attorney fees in earlier cases… I believe defendants’ reliance on the transactions priced at the WPG Formula was sufficiently reasoned to preclude a finding that there was no legal issue in this case upon which reasonable parties could differ. That is, parties could and did reasonably differ on the legal import of the WPG Formula. The WPG Formula ultimately may have had no weight in my valuation analysis and may have played an unduly large role in guiding defendants’ other valuations of Sunbelt stock at the time of the 1997 Merger, but it did present me with a legitimate legal question and a potentially legitimate valuation metric for Sunbelt. I therefore do not find defendants to have conducted themselves with the necessary egregiousness or vexatiousness to warrant shifting attorneys’ fees.”
A buy sell agreement is an effective tool to create a predictable value for shares in a closed (non-public) corporation. However, what happens if the buy sell provision refers to an exhibit that is not attached and the formula simply cannot be applied as intended in the agreement? The New York Appellate Division dealt with that issue in Sullivan v. Troser Management, Inc., N.Y.S.2d , 2010 WL 2636019 (N.Y.A.D. 4 Dept.), 2010 N.Y. Slip Op. 05894
That case was decided on July 2, 2010. “[T]he dispute … relate[d] to the value of an 18% stock interest in a ski resort under the parties’ “buy–sell” agreement (“agreement”).” The Court held that “the purchase price provision of the agreement [was] unenforceable, and the value of plaintiff’s stock should therefore be determined pursuant to the formula set forth in the unrelated New York case, Lewis v. Vladeck, Elias, Vladeck, Zimny & Engelhard(57 N.Y.2d 975), i.e., based on a percentage interest in defendant’s assets.” Id at 1.
The Court concluded that “[t]he ‘Purchase Price’ provision of the agreement expressly states that the price of the shares of stock shall be ‘an amount agreed upon annually by the Stockholders as set forth on the attached Schedule A.’ It is undisputed that no Schedule A exist[ed]. That provision further state[d] that, ‘[i]n the event that no annual value is established, the value shall be the last agreed upon value except that if no such agreed upon value is established for a period of two years, the value shall be the last agreed upon value increased or decreased by reference to an increase or decrease in book value of [defendant] from the date of the last agreed upon value to the date of death or disability” of the stockholder seeking to sell his or her shares.’ Id at 1
The problem was that “the stockholders … never agreed upon a value of the stock, and … the purchase price of [the] shares therefore [could] not be ascertained in accordance with the terms of the agreement… Indeed, there is no evidence in the record that plaintiff has ever agreed upon a value of the stock. Id at 2
Therefore, the method of valuation was based solely on a percentage interest (in this case, 18%) in the assets of the ski resort.