Tennessee Supreme Court Adopts Modern Methods To Value Stock

Friday, June 8, 2018

In a case involving dissenting shareholders forced out of a closely held Nashville corporation, the Tennessee Supreme Court has overruled its prior case law and adopted a standard that allows trial courts to use modern methods to determine the “fair value” of the dissenting shareholders’ stock.

In the case before the Court, Nashville corporation Athlon Sports Communications, Inc., marketed special-interest sports publications and memorabilia.  Athlon enjoyed steady profits until it fell victim to the global downturn of the late 2000s.  In 2010, it hired executive Stephen Duggan, who created a turnaround plan for the company.  Mr. Duggan’s turnaround plan successfully generated increased circulation of Athlon’s sports publications, but did not increase Athlon’s profits.

By the fall of 2011, Athlon’s financial circumstances had become dire.  In an effort to become profitable, in early 2012, Athlon’s board of directors approved a plan of merger.  Some dissenting shareholders, including Mr. Duggan, were forced out in the merger.

Under Tennessee’s “dissenters’ rights” laws, when dissenting shareholders are forced out of a closely held corporation, the corporation must pay them the “fair value” of their stock.  If the dissenting shareholders disagree with the amount the corporation proposes to pay, the corporation can file a lawsuit to ask a court to determine the fair value of their stock.

Athlon offered to pay Mr. Duggan and the other dissenting shareholders 10 cents per share as the “fair value” of their stock; they disagreed and claimed that it was worth much more.  Athlon then filed a lawsuit asking the Davidson County Chancery Court to determine the fair value of the dissenting shareholders’ stock.

After a trial, the chancery court held that the dissenters’ stock was worth 10 cents per share.  In doing so, the chancery court relied on a 1983 Tennessee Supreme Court case adopting the “Delaware Block” method of stock valuation.  The method is called “Delaware Block” because, from the 1950s to the early 1980s, it was the exclusive method used for valuing stock by Delaware courts, which are well-known for their expertise in corporate law.  Mr. Duggan appealed, and the Court of Appeals affirmed the trial court’s decision.

The Tennessee Supreme Court accepted the case for appeal and, in its decision, discussed the valuation methods that can be used to determine the fair value of a dissenting shareholder’s stock.  The Court noted that Delaware courts have largely discontinued use of the traditional Delaware Block method of valuation.  Instead, Delaware courts now favor more modern valuation methods that take into account the projected future profitability of a merged corporation, such as the discounted cash flow method.  The Supreme Court pointed out that nearly all other states now use the more modern, forward-looking methods of valuation.

Considering the changes that have occurred since its 1983 case was decided, the Supreme Court said that it was time to bring Tennessee’s law current, commenting that “the law must change when necessary to serve the needs of the people.”  The Court overruled the 1983 case to the extent that it required trial courts to use only the Delaware Block method of valuation. It adopted a more open approach that allows trial courts to use more modern methods to determine the fair value of the stock of dissenting shareholders.

Ultimately, because the trial court and the parties may have been operating under the mistaken assumption that Delaware Block was the only valuation method that was available to them, the Supreme Court remanded the case to the trial court to give that court the opportunity to reconsider its valuation of the dissenting shareholders’ stock in Athlon.

To read the unanimous opinion in Athlon Sports Communications, Inc. v. Stephen C. Duggan et al., authored by Justice Holly Kirby, go to the opinions section of TNCourts.gov.

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