What is the meaning of fair value in statutory determinations in Iowa? Well, apparently, it depends, as we learn in Rolfe State Bank v. Gunderson et al (No. 09-0651, Filed February 11, 2011)
Rolfe State Bank, an Iowa chartered state bank in Rolfe, Iowa was substantially owned by Dixon Bancshares, Inc. During 2008, the board of directors of Rolfe State Bank effected a reverse stock split, the effect of which was to squeeze out the Bank’s remaining minority shareholders, and to provide for them to receive the fair market value of their shares. Fair market value was determined to be $2,000 per share based largely on an appraisal performed by BCC Advisors, Des Moines, Iowa with two small upward adjustments by the Bank’s board of directors.
This was not an unusual transaction. Most bank holding companies own 100% of the stock in their subsidiary banks. Dixon Bancshares evidently desired to obtain that same result, and did.
By way of perspective, there are 333 banks in Iowa as of today. Of these, all but 22 are owned by bank holding companies. I don’t know how many of the Iowa bank holding companies own 100% of the stock of their bank subsidiaries, but experience would suggest that the great majority of them do. Of the 22 banks not owned by bank holding companies, 20 of them are state banks, with the other two being national banks regulated by the Office of the Comptroller of the Currency.
This Iowa case, then, involved the minority appraisal rights of shareholders of an Iowa state bank in a reverse stock split. After Rolfe State Bank, there are likely very few others, since most banks are wholly-owned by their parent bank holding companies.
The lower (district) court concluded that the Bank had misinterpreted Iowa law to require the consideration of valuation factors recognized for federal tax purposes, including minority status and marketability discounts. In its appeal, the Bank argued that the district court “ignored both the plain meaning of the statute and its legislative history.” The Iowa Supreme Court affirmed the lower court’s decision that section 524.1406(3)(a) does not apply to state banks engaging in reverse stock splits.
We see the implications of the decision in the levels of value chart below. The Bank argued that value should be at the nonmarketable minority level. That is the bottom conceptual level on the chart, and relates to the value of individual interests in banks (or companies). The district court disagreed and said that the minority interest and marketability discounts should not apply, which called for value at the control value level, or at or towards the top conceptual level on the chart. For purposes of this discussion today, I won’t go into differences at the controlling interest levels.
In reaching its conclusion, the Supreme Court found that minority interest and marketability discounts do not apply to state banks in Iowa engaged in reverse stock splits. The interesting thing about this case is that, had Rolfe State Bank been owned by a one-bank holding company, the discounts would have applied.
The Supreme Court cited a 1996 case to provide historical perspective. In Security State Bank v. Ziegeldorf, 554 N.W.2d 884 (1996), the Supreme Court held that minority interest and marketability discounts could not be applied in determining the fair value of dissenters shares in reverse stock split transactions. The entities involved in that case were Security State Bank, Hartley and Security State Bank, Lake Park.
Following that decision, the legislature amended the Iowa Banking Act (Iowa Code section 524.1406), a provision dealing with bank mergers. There was another amendment to legislation in 2000 that addressed the issue of marketability and minority discounts for bank holding companies. The Supreme Court further examined the legislative history and legislative intent and found that the statutory language allowing consideration of valuation discounts pertained only to bank holding companies, and not to banks. The decision reached the following conclusion:
When the legislature provides for expanded application of marketability an minority discounts for bank holding companies in the bright sunshine of Iowa Code section 490.1301, we do not think it very easy to imply that the legislature intended the same result to occur with respect to banks in the shadow of the merger provisions of Iowa Code chapter 524.
…applying the established rules of statutory construction, we conclude that the amendment to section 524.1406(3)(a) was intended to effectuate the extension of the discounts to bank holding companies. If the legislature wishes to amend Iowa Code chapter 490 to apply the discounts to banks in a wide variety of appraisal rights contexts, including a reverse stock split, it is free to do so.
In all likelihood, the legislature was lobbied by the banking industry for more favorable treatment of bank holding companies in reverse stock splits (relative to the doctrine of Ziegeldorf, which did not allow valuation discounts in statutory fair value determinations. This more favorable treatment came by allowing treatment of discounts for bank holding companies. Chances are, everyone thought that the legislation would apply to both banks and bank holding companies.
Recall that I speak from business and valuation perspectives only and offer no legal opinions. It would appear that fair value in statutory determinations in Iowa considers the following:
- For corporations generally and for Iowa state chartered banks. Statutory fair value is the economic equivalent of fair market value at a controlling interest level. This inference is consistent with the interpretation in Rolfe State Bank of the meaning of of Zieleldorf. This is the interpretation found in many states.
- For Iowa bank holding companies. Statutory fair value is the economic equivalent of fair market value at the nonmarketable minority level of value.
For corporations generally and for the 20-plus Iowa state chartered banks, statutory fair value means one thing and for Iowa bank holding companies, it means quite another. Interesting.