The Supreme Court of the State of Nevada recently issued an opinion regarding the determination of statutory fair value in an interest matter. See American Ethanol, Inc. v. Cordillera Fund, LP, 2011 WL 1706823 (Nev.)(May 5, 2011).
The Cordillera Fund purchased 583,334 shares of convertible preferred stock of American Ethanol for a price of $3.00 per share, or an investment of $1.75 million. This investment occurred in 2006 at an unspecified date. In July 2007, American Ethanol and appellant AE Biofuels, Inc., formalized a merger agreement, and American Ethanol notified its stockholders of their NRS Chapter 92A right to dissent. In response, Cordillera gave American Ethanol notice of its intent to dissent and demand payment for its total shares. The other American Ethanol stockholders approved the merger, and on December 7, 2007, the articles of merger were filed with the Nevada Secretary of State.
We learn the following from the case:
- Cordillera Fund perfected its right to dissent and to have the fair value of its shares determined by the trial court.
- Cordillera did not hire an appraiser, but pointed to offering documents which indicated that the value of its convertible preferred shares was $3.00 per share at the merger date.
- American Ethanol advanced the thought that the fair value was $0.15 per share, based on the book value of the stock.
- Neither side submitted an appraisal of the American Ethanol convertible preferred shares.
- The trial court found that the fair value of the shares was $3.00 per share, plus statutory interest.
- American Ethanol appealed claiming that the trial court had abused discretion because Cordillera failed to meet its burden of proof regarding the fair value of the shares.
No Abuse of Discretion
Following a line of Delaware cases, the Nevada Supreme Court held that both parties have the burden of proof regarding establishing fair value at trial. The trial court judge then has the responsibility of reaching his or her final determination of fair value after considering all the evidence. The question of the burden of proof was one of first impression in a statutory fair value case in Nevada. The Court concluded:
The Delaware approach accords with notions of judicial economy and fairness, because it places on the parties the affirmative duty to prove their respective valuations but recognizes that, in the end, the court remains the final arbiter of fair value. As in Delaware, Nevada law makes the court the final arbiter of fair value. See NRS 92A.490(1) (the “corporation shall . . . petition the court to determine the fair value”); NRS 92A.490(5)(a) (“dissenter . . . is entitled to a judgment [f]or the amount, if any, by which the court finds the fair value of the dissenter’s shares”). Accordingly, we adopt Delaware’s approach in determining fair value of a dissenting stockholder’s shares of stock. As such, in a stockholder’s right-to-dissent appraisal action, both the dissenting stockholder and the corporation have the burden of proving their respective valuation conclusions by a preponderance of the evidence in the district court. Final responsibility for determining fair value, however, lies with the court, which must make its own independent value determination.
The Court held that there had been no abuse of discretion on the part of the trial court, which had considered all of the evidence presented before it by both parties to the litigation.
Statutory Fair Value
Having found no abuse of discretion, the Supreme Court’s conclusion of agreeing with the trial court’s determination of value at $3.00 per share was foreordained. What else can we learn from the case?
Fair value was to be determined under what is now the prior statute, or the statute that existed in December 20007 at the merger date. The relevant version of NRS 92A.320 stated only that fair value is “the value of the shares immediately before the effectuation of the corporate action to which [the stockholder] objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable” NRS 92A.320 (2008); see 3 Model Bus. Corp. Act Ann. § 13.01 (4th ed. 2008). There was no further guidance for Nevada courts, so fair value must be defined, and then determined by, the courts.
The Nevada statute was changed in 2009 to provide somewhat more guidance from the legislature (NRS 92A.320):
“Fair value,” with respect to a dissenter’s shares, means the value of the shares determined:
1. Immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable;
2. Using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal; and
3. Without discounting for lack of marketability or minority status.
This new definition is in the direction of defining statutory fair value in Nevada as an enterprise level concept. It could be interpreted as representing the financial control level of value. The new statutory guidance will be helpful to business appraisers and, hopefully, the courts, in future statutory fair value determinations in Nevada.
What Really Happened?
It is not always possible to figure out the motivations of the parties based on reading appellate level cases. We know that when there is a valuation dispute, the buyer wants to pay as little as possible and the seller wants to receive as much as possible. That is human nature and uninformative.
It would seem that Cordillera was motivated to get back its 2006 investment of $3.00 per share ($1.75 million). That motivation is fairly clear. Why then would American Ethanol argue that the shares were only worth $0.15 per share less than two years after the investment (December 2007)? The answer to this question may be fairly clear, as well. By the time that the matter got to trial, things were probably not going as well with American Ethanol (or AE Biofuels, its successor). Take a look at the stock chart.
American Ethanol likely did not want to pay $3.00 per share to purchase the convertible preferred shares because their stock’s performance was declining and in the tank by the time the matter got to court. [I don't know the relationship between the pricing of the convertible preferred and the common shares.] However, as was made clear in the case, the valuation date was in December 2007, and fair value was determined as of that date.
Interestingly, neither side introduced a valuation expert or independent assessments of the fair value of the convertible preferred shares. One can only wonder at the positions taken, or why either side, much less both sides, would not have an independent appraisal of the fair value of the shares as of the valuation date.
The Supreme Court decision, in a footnote, stated:
Although an appraisal would have been advantageous, neither party had an obligation to provide an appraisal pursuant to NRS 92A.490(1). In addition, while it might have been effective for the district court to appoint an appraiser pursuant to NRS 92A.490(4), it was under no obligation to do so. During oral argument, appellants’ counsel stated that appraising Cordillera’s shares of stock would be an extraordinarily difficult endeavor because: (1) Cordillera owned preferred stock, not common stock; (2) American Ethanol stock was not trading on a stock exchange; and (3) Cordillera owned very few shares of stock in relation to the total amount of the outstanding stock. Appellant’s counsel maintains that an appraiser was obtained by appellants, but that the appraiser could not provide an appraisal. (emphasis added)
I find it interesting that the appellants (that’s American Ethanol) argued that a business appraiser was not able to determine a value for the convertible preferred shares for the reasons indicated in the quote above.
One might wonder if they retained an expert at the very latest minute and he or she was unable to complete the assignment because of time constraints. I’m not sure that the Supreme Court justices believed that argument, stating that an appraisal(s) would have been “advantageous.”
See also the post about this case in BV Wire News.