IN THE SUPREME COURT OF IOWA
No. 17 / 05-0340
Filed July 13, 2007
NORTHWEST INVESTMENT CORP.,
Appellant,
vs.
EMMETT LEE WALLACE, WILLIAM R.
HARVEY and HELEN I. HARVEY,
Appellees.
Appeal from the Iowa District Court for Scott County, David E.
Schoenthaler, Judge.
Corporation appeals district court’s determination of “fair value” in an
appraisal action following a reverse stock split. AFFIRMED.
John F. Lorentzen of Nyemaster, Goode, West, Hansell & O’Brien,
P.C., Des Moines, for appellant.
Terry M. Giebelstein of Lane & Waterman, LLP, Davenport, for
appellee Emmett Lee Wallace.
Steven H. Jacobs of Betty, Neuman & McMahon, LLP, Davenport, for
appellees Harveys.
2
STREIT, Justice.
“This is a story about control.”1 Minority shareholders who were
required to redeem their shares after a reverse stock split refused to accept
the corporation’s offer to buy back their shares. They complained the offer
did not include the additional amount a buyer would theoretically pay to
own a controlling interest in the corporation. The district court held the
proper valuation of the minority shareholders’ stock included a control
premium. On appeal, we must determine (1) whether Iowa’s statute
requiring a corporation in a reverse stock split to pay the shareholders “fair
value” for their shares permits the addition of a control premium; and if so
(2) whether there is substantial evidence to support the addition of a control
premium in this case. We find Iowa’s statutory definition of “fair value”
implicitly requires the shares to be valued on a marketable, control basis.
Because the minority shareholders presented credible evidence the
corporation could obtain a significant control premium in the event of a
sale, we affirm.
I. Facts and Prior Proceedings.
Dr. Emmett Lee Wallace, William R. Harvey, and Helen I. Harvey
(collectively the “minority shareholders”) once owned stock in River Cities
Investment Co. Wallace owned approximately 7.1% of the outstanding
shares (35,196) and the Harveys owned approximately 1.5% (7,291). The
balance of the outstanding shares was owned by Northwest Investment
Corp.
River Cities’ principal asset was the indirect ownership of stock in
Northwest Bank and Trust Company (“bank”). River Cities owned 100% of
the Northwest Bank Holding Company, which in turn owned 84% of the
1Janet Jackson, Control, on Control (A & M Records 1986).
3
bank. In addition, Northwest Bank Holding Company owned other assets,
including a $2,400,000 note receivable and $455,000 in deferred tax debits.
In September 2003, at a special meeting, River Cities’ shareholders
adopted by resolution the first amendment to the Amended and Restated
Articles of Incorporation of River Cities. The amendment provided the
aggregate number of shares the corporation may issue is limited to 200
shares of common stock.2 This action reduced the aggregate number of
outstanding shares which had previously been 496,507. As a result of this
amendment, the minority shareholders became owners of fractional shares
of new stock. The amendment provided no fractional shares would be
issued; any fractional shares created would be acquired for cash. The
amendment effectively forced the minority shareholders to sell their shares
back to River Cities.
River Cities’ board of directors determined the fair value of the old
stock was $33.23 per share immediately before the reverse stock split. This
figure was based on an appraisal prepared by Wayne Brown of Clifton
Gunderson LLP.
Shortly after the special meeting, River Cities merged into Northwest
Investment (the majority shareholder). Northwest Investment then timely
paid the minority shareholders $33.23 per share of old stock plus interest
from the date of the resolution adopting the first amendment. It also gave
the minority shareholders notice of their appraisal rights as required by
Iowa Code section 490.1324 (2003).
The minority shareholders made a timely demand for further payment
under Iowa Code section 490.1326. They demanded $64 per share for their
old stock. This demand was based on an appraisal prepared by Richard F.
Maroney, Jr. of Austin Associates, LLC. The shareholders timely tendered
2This is commonly referred to as a reverse stock split.
4
the certificates representing their shares of the old stock for transfer to
Northwest Investment.
Northwest Investment received the minority shareholders’ demand for
additional payment but disagreed with the minority shareholders’ valuation.
Consequently, Northwest Investment brought this action in February 2004.
See Iowa Code § 490.1330 (if the corporation refuses shareholder’s demand
for additional payment, then it must commence a proceeding within sixty
days after receiving payment demand and petition the court to determine
fair value).
After initiating this action, Northwest Investment’s board of directors
requested a second appraisal from Clifton Gunderson. Ronald E. Nielsen of
Clifton Gunderson completed his appraisal report in August 2004. He
concluded the fair value of the old stock immediately prior to the reverse
stock split was $48 per share.
Based on Nielsen’s appraisal, Northwest Investment paid the minority
shareholders an additional $14.77 per share, which is the difference
between $33.23 and $48. Northwest Investment also paid interest to the
minority shareholders, which is required by law. Northwest Investment
made these payments to the minority shareholders without prejudice to
their right to appraisal in this action. The minority shareholders refused to
accept $48 per share as full payment for their old stock in River Cities.
The case was tried to the district court. The district court found
Maroney’s testimony more credible and adopted his opinion that the fair
value of the old stock was $64. The district court denied both parties’
requests for attorney fees.
Northwest Investment appealed. On appeal, Northwest Investment
argues (1) the district court erred by adopting Maroney’s appraisal because
he included a premium for control in his valuation and (2) the district court
5
erred by not awarding Northwest Investment attorney fees and expert
witness expenses.
II. Scope of Review.
Actions to determine the value of stock pursuant to section 490.1330
are at law. Sieg Co. v. Kelly (Sieg II), 568 N.W.2d 794, 797 (Iowa 1997)
(citing Sieg Co. v. Kelly (Sieg I), 512 N.W.2d 275, 278 (Iowa 1994)). Our
review is for errors of law. Id. (citing Sieg I, 512 N.W.2d at 278). The district
court’s findings of fact are binding on us if supported by substantial
evidence. Id. (citing Iowa R. App. P. 14(f)(1) (now Rule 6.14(6)(a))).
III Merits.
A. Control Premium. The principal differences between the
appraisers’ conclusions of value stem from their use of control premiums
and Maroney’s use of guideline transactions involving sale-of-control data.
Northwest argues Maroney’s inclusion of a control premium is unwarranted
because Northwest Bank is a well-run, efficient bank. According to
Northwest, a control premium is justified only if there is “substantial
evidence of the inefficient use of assets of the company being appraised.”
Northwest also claims Maroney’s “control premium” is really an
impermissible award of “synergistic value.” Before addressing the evidence
of this case, we must first determine whether the addition of a control
premium is permissible under Iowa Code section 490.1301(4).
1. Fair value. Iowa Code chapter 490 gives a shareholder “appraisal
rights” and the right to obtain “fair value” for his or her shares upon the
occurrence of enumerated corporate action, including a reverse stock split.
Iowa Code § 490.1302(1)(d). The corporation must commence an action to
determine the fair value of the minority shareholder’s stock if the
shareholder and corporation cannot agree on a price. Id. § 490.1330.
6
Under Iowa Code section 490.1301(4), “fair value” means:
the value of the corporation's shares determined according to
the following:
a. Immediately before the effectuation of the corporate
action to which the shareholder objects.
b. Using customary and current valuation concepts and
techniques generally employed for similar businesses in the
context of the transaction requiring appraisal.
c. Without discounting for lack of marketability or
minority status . . . .
With respect to shares of a corporation that is a bank holding
company as defined in section 524.1801, the factors identified
in section 524.1406, subsection 3, paragraph "a", shall also be
considered in determining fair value.3
We have repeatedly stated there is no predominant, perfect formula
for arriving at fair value. Sieg II, 568 N.W.2d at 798; Sec. State Bank v.
Ziegeldorf, 554 N.W.2d 884, 888 (Iowa 1996); Sieg I, 512 N.W.2d at 278; see
also Model Bus. Corp. Act § 13.01 cmt. 2, at 13-9 (2005) (stating subsection
(b) “adopts the accepted view that different transactions and different
contexts may warrant different valuation methodologies”). We have
recognized three popular approaches to appraising stock: market value,
investment value, and net asset value. Sieg I, 512 N.W.2d at 278 (citing
Richardson v. Palmer Broad. Co., 353 N.W.2d 374, 378 (Iowa 1984)). “The
usefulness of any particular approach depends on the facts and
circumstances of each case.” Sieg II, 568 N.W.2d at 798 (citing Ziegeldorf,
554 N.W.2d at 889). Each method is “designed to independently produce
the full measure of the fair value of the stock rather than a component of
fair value.” Richardson, 353 N.W.2d at 378–79. Moreover, “[m]odern
valuation methods will normally result in a range of values, not a particular
single value.” Model Bus. Corp. Act § 13.01 cmt. 2, at 13-9. “The court
3The parties agree River Cities was not a bank holding company within the meaning
of Iowa Code § 524.1801. Therefore, the last sentence of the definition is not relevant.
7
should consider any relevant factor not inconsistent with the statutory
definition of ‘fair value.’ ” Sieg II, 568 N.W.2d at 798. Factors to be
considered include:
the rate of dividends paid, the security afforded that dividends
will be regularly paid, the possibility that dividends will be
increased or diminished, the size of the accumulated surplus
applicable to the payment of dividends, the record of the
corporation, its prospects for the future, the selling price of
stocks of like character, the value of its assets, book values,
market conditions, the reputation of the corporation, and all
relevant factors that may influence the valuation.
Sieg I, 512 N.W.2d at 279 (citing Robbins v. Beatty, 246 Iowa 80, 91, 67
N.W.2d 12, 18 (1954)).
The Iowa legislature adopted the current definition of fair value in
2002. 2002 Iowa Acts ch. 1154, § 78. The definition is derived from the
1999 amendment to section 13.01(4) of the Model Business Corporation Act
(“MBCA”).4 The 1999 amendment to section 13.01(4) expressly prohibits
“discounting for lack of marketability or minority status.” Prior to the
change, the MBCA’s definition was silent on whether such discounts were
appropriate. Consequently, courts interpreting statutes based on the
MBCA’s previous definition were split on the issue of discounts. Compare
Atl. States Constr., Inc. v. Beavers, 314 S.E.2d 245, 250–51 (Ga. Ct. App.
1984) (holding minority discount is permissible); Columbia Mgmt. Co. v.
Wyss, 765 P.2d 207, 213 (Or. Ct. App. 1988) (holding marketability
discount is proper but a minority discount is inappropriate), with Hansen v.
75 Ranch Co., 957 P.2d 32, 41 (Mont. 1998) (holding minority discount is
not appropriate); Hogle v. Zinetics Med., Inc., 63 P.3d 80, 90–91 (Utah 2002)
4The last unnumbered paragraph of Iowa Code section 490.1301(4), which defines
fair value, is not derived from the MBCA. It originated in a 2000 amendment to the Iowa
Code. See 2000 Iowa Acts ch. 1211, § 2.
8
(holding discounts based on lack of marketability and lack of control are
impermissible).
In comments accompanying the 1999 amendment, the MBCA states
valuation discounts for lack of marketability or minority status
are inappropriate in most appraisal actions, both because most
transactions that trigger appraisal rights affect the corporation
as a whole and because such discounts give the majority the
opportunity to take advantage of minority shareholders who
have been forced against their will to accept the appraisal-
triggering transaction.
Model Bus. Corp. Act § 13.01 cmt. 2, at 13-10.
Although six other states5 have adopted the MBCA’s current
definition of fair value with respect to appraisal rights, no appellate court in
these jurisdictions has been asked to determine whether “fair value” may
include a control premium. For guidance we turn to the official comments
following MBCA section 13.01. See Richardson, 353 N.W.2d at 376–77
(referring to an earlier official comment to the MBCA).
Subsection (c) prohibits discounting for lack of marketability or
minority status. The official comment explains subsection (c) is “designed
to adopt a more modern view that appraisal should generally award a
shareholder his or her proportional interest in the corporation after valuing the
corporation as a whole, rather than the value of the shareholder’s shares
when valued alone.” Model Bus. Corp. Act § 13.01 cmt. 2, at 13-10
(emphasis added); see Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1144
(Del. 1989) (stating the corporation must be valued as an entity before
determining the shareholder’s proportionate interest). If an appraiser is
valuing the corporation as a whole, then a control premium is certainly
5The six other states are Connecticut, Idaho, Maine, Mississippi, Virginia, and West
Virginia. See Conn. Gen. Stat. § 33-855(4); Idaho Code Ann. § 30-1-1301(4); Me. Rev. Stat.
Ann. tit. 13-C, § 1301(4); Miss. Code Ann. § 79-4-13.01(4); Va. Code Ann. § 13.7-729;
W. Va. Code § 31D-13-1301(4). Florida has adopted a variation of the new MBCA
definition. See Fla. Stat. § 607.1301(4).
9
proper. A control premium is the additional consideration an investor
would pay over the value for a minority interest in order to own a controlling
interest in the common stock of a company. Shannon P. Pratt, Valuing a
Business: The Analysis and Appraisal of Closely Held Companies 349 (4th
ed. 2000) (quoting Control Premium Study, 4th quarter 1999 (Los Angeles:
Applied Financial Information, LP, 1990), p. ii). “A controlling interest is
considered to have greater value than a minority interest because of the
purchaser’s ability to effect changes in the overall business structure and to
influence business policies.” Id.
Our legislature made a policy decision when it adopted the current
definition of “fair value.” By not allowing a discount for lack of
marketability or minority status, the legislature implicitly required shares to
be valued on a marketable, control interest basis. We therefore hold a
control premium may be considered in determining fair value if supported
by the evidence. See Rapid-Am. Corp. v. Harris, 603 A.2d 796, 804 (Del.
1992) (holding the trial court improperly refused to add a control premium
to publicly traded equity value of corporation’s shares for each of the
corporation’s operating subsidiaries in determining valuation in an
appraisal action); Borruso v. Commc’ns Telesystems Int’l, 753 A.2d 451, 457–
58 (Del. Ch. 1999) (adding thirty percent premium because comparable
company analysis reflects inherent minority discount); In re 75,629 Shares
of Common Stock of Trapp Family Lodge, Inc., 725 A.2d 927, 935 (Vt. 1999)
(thirty percent premium for control added to adjust for trading price of
minority shares); Casey v. Brennan, 780 A.2d 553, 571 (N.J. Super. Ct. App.
Div. 2001) (concluding “that in a valuation proceeding a control premium
should be considered in order to reflect market realities”). We now turn to
the dueling appraisals in this case.
10
2. Nielsen’s appraisal. Nielsen was Northwest Investment’s
appraiser. He is a Certified Public Accountant and partner at Clifton
Gunderson. He is also an Accredited Senior Appraiser. Nielsen primarily
relied on an income approach in determining the value of the bank. An
income approach assumes the value of the company is derived from the
generation of income. In taking this approach, Nielsen employed a
capitalization-of-earnings method. Capitalization of earnings involves an
estimation of the company’s ongoing net earnings and a determination of
the risks associated with generating those earnings (capitalization rate).
Additionally, Nielsen used a market-based approach to valuing the
bank. A market-based approach values a company with factors derived
from comparable companies that are publicly traded. The particular
method Nielsen employed was the guideline company method for price-to-
book value. This method derives an estimated price-to-book multiple from
the stock price of publicly traded guideline companies as compared to their
book values. Nielsen applied the multiple to his opinion of the adjusted
book value of the bank. To this figure, he added a 15% control premium.
Nielsen reasoned the premium was necessary because the stock prices used
in this method reflect a minority interest price.6
To determine the final value of River Cities, Nielsen combined the two
approaches. He gave 90% weight to the income method figure and 10%
weight to the market-based method figure. Nielsen then “rolled up” his
combined value into Northwest Bank Holding Company and ultimately River
Cities, based on its 84% ownership of the bank. To this figure, Nielsen
added the value of the other assets owned by Northwest Bank Holding
6On appeal, Northwest Investment argues it was improper for Nielsen to add a
control premium to his market based valuation. According to Northwest Investment, the
control premium only represents 60¢ of Nielsen’s $48 valuation conclusion.
11
Company.7 Nielsen then rolled up this net value into River Cities based on
River Cities’ direct ownership of 100% of Northwest Bank Holding Company.
Finally, he divided his conclusion, which valued River Cities as a whole, by
the number of outstanding shares in River Cities and arrived at a value of
$48 per share for the old stock.
3. Maroney’s appraisal. Maroney, who was hired by the minority
shareholders, is a principal of Austin Associates, a bank consulting firm.
He has a Master’s degree in Business Administration. Maroney used a
combination of valuation methods in his appraisal of River Cities. Maroney
used a discounted cash flow (“DCF”) method, which is a type of income
approach valuation. The DCF method uses the same basic components of
the capitalization-of-earnings method. In addition, it includes a projection
of future value from net earnings and a residual value at the end of the
projected period, which must be discounted to present value.
Maroney also utilized a market-based approach. He considered two
types of guideline transactions: transactions of publicly traded stock and
transactions involving the sale of financial companies to other companies or
groups (i.e. sale of control). He created a price-to-tangible book value ratio
and a price-to-earnings multiple for each guideline type to determine River
Cities’ value.
Through these methods Maroney arrived at a total of five different
values for River Cities (one for the DCF method, two using guideline
transactions of publicly traded stock, and two using guideline transactions
for sale of control of financial institutions). For each of these values,
7Nielsen
utilized the net asset method to determine the value of these other assets.
This method sums the value of the assets and subtracts the liabilities associated with those
assets.
12
Maroney divided by the number of outstanding shares of old stock
(496,507).
Next, Maroney added a 40% control premium to three of the five
values—the DCF value and the two values based on guideline transactions
of publicly traded stock. At trial, Maroney defined control premium as the
“amount another organization or another group of people would pay to get
control—controlling interest in a financial institution or any company.” He
explained the addition of a control premium is necessary to convert a
“marketable, minority interest” value to a “marketable controlling interest”
value. According to Maroney, the two values based on guideline
transactions for sale of control of financial institutions do not require the
addition of a control premium because control is already embedded in the
values. To determine the appropriate control premium, Maroney reviewed
bank and thrift sale transactions since 2001 (169 transactions). Maroney
determined the percentage of the sale price representing control premium
by comparing the announced sale price to the pre-announced stock price of
the selling institution. The median control premium for all bank sales since
2001, using stock prices one month prior to the sale, was 41.2%. The
median result for all thrift sales was 36.4%. Control premiums using the
stock price three months prior to the sale were 52.1% for banks and 44.3%
for thrifts. Maroney found the bank results more applicable to River Cities
due to Northwest Bank’s strong commercial lending. Accordingly, he
selected 40% to use for a control premium in valuing River Cities.
Maroney’s five values for a single share of old River Cities stock were:
Discounted Cash Flow with Control Premium $57.73
Guideline Transactions:
Publicly Traded Stocks with Control Premium
Price-to-Tangible Book Value Ratio $61.03
13
Price-to-Earnings Multiple $72.99
Sale of Control
Price-to-Tangible Book Value Ratio $61.36
Price-to-Earnings Multiple $69.52
To reach a final fair value determination, Maroney considered a simple
average of the results ($64.53), the average of the three methods after
averaging the two results in each of the guideline approaches ($63.39), the
average of the three results after excluding the high and low ($63.97) and
the median value ($61.36). Maroney ultimately determined the fair value of
River Cities’ stock was $64 per share.
The district court found Maroney’s appraisal more credible than
Nielsen’s. The court noted Nielsen’s appraisal was significantly lower than
recent appraisals done by Clifton Gunderson (Nielsen’s employer) for the
bank’s employee stock option plan and the bank’s own reverse stock split.
The court found these multiple inconsistent appraisals of substantially the
same assets difficult, if not impossible, to reconcile. Second, the court
found no rational basis for the percentage weighting given by Nielsen to the
valuation methods he used. Finally, the court disagreed with Nielsen’s
position that a well-run, high performing business, such as the bank,
should either have no or very little control premium added to determine fair
value. The district court adopted Maroney’s opinion that $64 was the fair
value of the minority shareholders’ old stock. We must decide whether
Maroney’s addition of a control premium was appropriate in this case.
4. Applied methods of valuation. On appeal, Northwest alleges
Maroney made several errors in his fair value determination. Northwest
contends well-run companies typically do not command a control premium.
At trial, Nielsen testified a buyer is willing to pay a larger premium to gain
control of a poorly-run company due to the ability to eliminate inefficiencies
14
and increase profits. Maroney, on the other hand, testified a well-run
company is just as likely to obtain a significant control premium. He
stated:
I think the fact that a company is highly profitable most likely
means that they are going to have more interest from more
buyers and more competition for the company and I don’t find
that to affect control premium at all.
The district court found Maroney more credible on this point, and we see no
reason to disturb the court’s finding.
Next, Northwest contends Maroney should have placed greater
emphasis on the income approach and less emphasis on the market-based
approach. According to Northwest, “[w]hen financial data of the company
being appraised is reliable, the principal method for determining fair value
is the income approach.” Northwest argues “market-based valuation
methods, which inherently reflect synergies, should be given little or no
weight.”
However, Maroney testified he considered each of the five methods he
used in this case to be valid and appropriate. He noted he preferred using a
variety of methods because there is a degree of uncertainty with respect to
the income approach, which is based on projections. Like the district court,
we see no reason to overemphasize the income approach. The market
approach to valuation provided helpful, additional evidence regarding the
value of the bank and by extension River Cities. See Shannon Pratt, The
Lawyer’s Business Valuation Handbook 105 (2000) (noting that while in
theory the income approach is the dominant approach in business
valuation, Revenue Ruling 59-60 and many investment bankers also put
heavy emphasis on the market approach).
15
Northwest also argues it was error for Maroney to add a control
premium to his income approach.8 In support of this contention, Northwest
provides the following quote from a Delaware case:
The discounted cash flow method purports to represent the
present value of [the corporation]'s cash flow. The calculation
arguably may have left out a premium that normally accrues
when shareholders sell a company. However, “the appraisal
process is not intended to reconstruct a pro forma sale but to
assume that the shareholder was willing to maintain his
investment position, however slight, had the merger not
occurred.” Plaintiff is not entitled to the proportionate sales
value of [the corporation]. Plaintiff is entitled to the
proportionate value of [the corporation] as a continuing
shareholder. The discounted cash flow analysis, as employed
in this case, fully reflects this value without need for an
adjustment.
In re Radiology Assocs., Inc. Litig., 611 A.2d 485, 494 (Del. Ch. 1991)
(citations omitted). While this position may be the law in Delaware, we
choose to follow the position of jurisdictions who determine fair value based
on “what a willing buyer realistically would pay for the enterprise as a whole
on the statutory valuation date.” BNE Mass. Corp. v. Sims, 588 N.E.2d 14,
19 (Mass. App. Ct. 1992); see In re Valuation of Common Stock of McLoon Oil
Co., 565 A.2d 997, 1004 (Me. 1989) (stating the district court must
determine “the best price a single buyer could reasonably be expected to
pay for the firm as an entity” and then “prorate[] that value for the whole
firm equally among all shares of its common stock”); Trapp Family Lodge,
Inc., 725 A.2d at 931 (same); see also Barry M. Wertheimer, The
Shareholders’ Appraisal Remedy and How Courts Determine Fair Value, 47
Duke L. J. 613, 654–55 (Feb. 1998) (advocating third party sales value, i.e.
the price at which the corporation as an entity could be sold to a third party
in an arm’s length transaction, should be a factor to consider in
8Northwest does not explain why its first appraiser, Wayne Brown, added a 35%
control premium to his income approach valuation.
16
determining “fair value”); 2 American Law Inst., Principles of Corporate
Governance: Analysis and Recommendations § 7.22(c) (1994) (“[T]he court
generally should give substantial weight to the highest realistic price that a
willing, able, and fully informed buyer would pay for the corporation as an
entity.”). To hold otherwise “would inevitably encourage corporate squeeze-
outs.” McLoon Oil Co., 565 A.2d at 1005. Thus, we find nothing wrong with
Maroney adding a control premium to his DCF valuation nor do we quarrel
with his use of guideline transactions involving the sale of control. As
Maroney’s research indicates, buyers are willing to pay a large premium
when purchasing an entire financial institution as opposed to a minority
interest. The minority shareholders are entitled to the proportionate share
of the control premium River Cities likely would obtain if the corporation
were for sale.
5. Synergy. Northwest Investment also complains Maroney’s control
premium is inflated with synergistic value because the market data, upon
which the premium is based, included corporate mergers. Synergistic value
arises “when two assets are more valuable in combination than in isolation
or, put otherwise, when two assets are more valuable when controlled by
the same firm than when controlled by different firms.” John C. Coates IV,
“Fair Value” as an Avoidable Rule of Corporate Law: Minority Discounts in
Conflict Transactions, 147 U. Pa. L. Rev. 1251, 1275 (1999); see Union Ill.
1995 Inv. Ltd. P’ship v. Union Fin. Group, Ltd., 847 A.2d 340, 356 (Del. Ch.
2004) (defining synergistic value as “the amount of any value that the
selling company’s shareholders would receive because a buyer intends to
operate the subject company, not as a stand-alone going concern, but as
part of a larger enterprise, from which synergistic gains can be extracted”).
Examples of synergies are “(1) reducing combined overhead by the
consolidation of operations [and] (2) raising prices by reducing competition.”
17
Pratt, Valuing a Business, at 346. Northwest Investment argues including
synergy is impermissible because the fair value of the minority
shareholders’ stock should be derived from the value of the bank as a
stand-alone enterprise rather than the value of the bank if it were to merge
with a larger enterprise.
Our statutory definition of “fair value” means “the value of the
corporation’s shares . . . immediately before the effectuation of the corporate
action to which the shareholder objects.” Iowa Code § 490.1301(4)(a). We
have previously said:
[T]he future opportunities for the company are certainly a
consideration in setting the value of the company’s stock. . . .
Thus, the relevant consideration is what prospects could
reasonably have been anticipated as of the date of valuation,
not what opportunities are actually realized subsequent to the
corporate action.
Sieg II, 568 N.W.2d at 798.
The minority shareholders did not present any evidence that a merger
is a reasonable prospect in the bank’s future or that valuation should be
based on anything other than as a stand-alone going concern. See
Ziegeldorf, 554 N.W.2d at 891. Nevertheless, there is nothing wrong with
Maroney basing his opinion, in part, on the aggregations of actual sales
data involving mergers and acquisitions. This evidence reflects the market
place. While Maroney conceded synergistic value was likely embedded in
his data, comparable sales transactions “are still the best empirical
evidence generally available to quantify control premium.” Pratt, Valuing a
Business, at 354. Moreover, at least one study suggests merger acquisitions
do not command higher premiums in comparison to acquisitions where the
corporation will continue to be operated as a stand alone company. Patrick
A. Gaughan, Mergers, Acquisitions, and Corporate Restructurings 528 (3d ed.
2002) (citing George R. Roach, “Control Premium and Strategic Mergers,”
18
Business Valuation Review (June 1998), pp. 42-49) (explaining the Roach
study of control premiums paid between 1992 and 1997 “failed to find any
difference in the control premium for those deals in which the merging
companies have the same or different Standard Industrial Classification
(SIC codes)”); Pratt, Valuing a Business, at 351 (same); see Coates, 147 U.
Pa. L. Rev. at 1331 (noting commentators “have widely varying intuitions
about the significance of merger synergies”). Pratt, a leading authority in
business valuation, simply cautions analysts to be cognizant of the possible
inclusion of synergistic value in the underlying data when selecting and
applying a control premium percentage. Pratt, Valuing a Business, at 360.
Unfortunately, a more principled approach to eliminating synergy is not
available because synergy is difficult, if not impossible, to quantify. See
Agranoff v. Miller, 791 A.2d 880, 899 (Del. Ch. 2001) (acknowledging the
difficulty in eliminating synergy from control sales data and admitting the
court’s “rough approach . . . simply involves shaving some percentage off
the top of the available information about control premiums paid”).
The record shows Maroney, based on median figures, determined
corporations similar to the bank have received control premiums in the
range of 36% and 52%. He used 40% in his appraisal of River Cities. As a
practical matter, Maroney’s conservative approach to value indicates he
attempted to remove any marketplace distortions. Although we cannot be
certain what effect, if any, synergistic value had on Maroney’s calculations,
it is more appropriate to accept Maroney’s control premium in order to
eliminate the minority discount which is proscribed by statute than to make
no adjustment at all. Borruso, 753 A.2d at 459 n.12; Casey, 780 A.2d at
571–72. Therefore, we affirm the district court’s decision to accept
Maroney’s opinion of River Cities’ fair value.
19
B. Attorney Fees & Witness Expenses. Northwest Investment also
argues the district court erred by not ordering the minority shareholders to
pay the corporation’s attorney fees and expert witness expenses. Iowa Code
section 490.1331(2)(b) states:
The court in an appraisal proceeding may . . . assess the fees
and expenses of counsel and experts for the respective parties
. . . [a]gainst either the corporation or a shareholder demanding
appraisal, in favor of any other party, if the court finds that the
party against whom the fees and expenses are assessed acted
arbitrarily, vexatiously, or not in good faith with respect to the
rights provided by the chapter.
We review the denial of a request for attorney fees and expenses under Iowa
Code section 490.1331 for abuse of discretion. Sieg II, 568 N.W.2d at 807.
Northwest Investment concedes it must prove there was no factual or
legal basis for the minority shareholders’ demand for $64 a share in order to
be even eligible for fees. Northwest Investment has obviously failed to meet
this burden. We affirm the district court’s denial of attorney fees and expert
witness expenses.
IV. Conclusion.
We hold the fair value of stock in an appraisal action may include a
control premium if the evidence supports the increase in value. The district
court properly added a control premium to its valuation of River Cities
because transactions involving the sale of financial institutions typically
include a large control premium. We therefore affirm the district court’s
determination that the minority shareholders’ shares were worth $64 each
immediately before the reverse stock split. Northwest Investment was not
entitled to an award for attorney fees and expert witness fees because the
minority shareholders did not act arbitrarily or in bad faith.
AFFIRMED.