ATHLON SPORTS COMMUNICATIONS, INC.
STEPHEN C. DUGGAN ET AL.
Session October 11, 2017
by Permission from the Court of Appeals Chancery Court for
Davidson County No. 12-1787-III Ellen H. Lyle, Chancellor
granted permission to appeal in this case to address the
methods by which a trial court may determine the "fair
value" of the shares of a dissenting shareholder under
Tennessee's dissenters' rights statutes, Tennessee
Code Annotated sections 48-23-101, et seq. In doing
so, we overrule Blasingame v. American Materials,
Inc., 654 S.W.2d 659 (Tenn. 1983), to the extent that
Blasingame implicitly mandates use of the Delaware
Block method for determining the fair value of a dissenting
shareholder's stock. We adopt the more open approach
espoused in Weinberger v. UOP, Inc., 457 A.2d 701,
712-13 (Del. 1983), in which the Delaware Supreme Court
departed from the Delaware Block method and permitted trial
courts to determine fair value by using any technique or
method that is generally acceptable in the financial
community and admissible in court. This approach allows trial
courts to utilize valuation methods that incorporate
projections of future value, so long as they are susceptible
of proof as of the date of the corporate action and not the
product of speculation. In this dissenters' rights case,
the defendant minority shareholders were forced out of the
corporation as a result of a merger, and the corporation
petitioned the trial court to determine the fair value of the
minority shareholders' stock. Both parties presented
expert testimony regarding the valuation of the dissenting
shareholders' stock, and both experts assumed that
Blasingame required use of the Delaware Block method
to value the stock. However, both experts also valued the
dissenting shareholders' stock under more modern
approaches, such as the discounted cash flow method. After a
bench trial, the trial court discredited the testimony of the
dissenting shareholders' expert and credited the
testimony of the corporation's expert. The trial
court's order indicates that it may have based its
decision on the premise that Blasingame compelled
use of the Delaware Block method to determine stock value.
we remand to the trial court to reconsider its determination
on valuation in light of our decision to partially overrule
R. App. P. 11 Appeal by Permission; Judgment of Court of
Appeals Reversed; Judgment of Trial Court Vacated; Case
Remanded to Trial Court
R. Jacobson and W. Russell Taber III, Nashville, Tennessee,
for the Defendant/Appellants, Stephen C. Duggan, Daniel R.
Grogan, and Robert Kelly Grogan.
S. Davidson and Laura P. Merritt, Nashville, Tennessee, for
the Plaintiff/Appellee, Athlon Sports Communications, Inc.
Kirby, J., delivered the opinion of the Court, in which
Jeffrey S. Bivins, C.J., and Cornelia A. Clark, Sharon G.
Lee, and Roger A. Page, JJ., joined.
and Procedural Background
Athlon Sports Communications, Inc. ("Athlon"), was
formed in 1967 and incorporated in 1972. It is a private,
closely-held corporation with its principal place of business
in Nashville, Tennessee. Athlon publishes special-interest
consumer sports magazines, websites, and other branded
products, including sports annuals, newsletters, and
handbooks. It also sells authenticated sports memorabilia to
consumers and wholesale clients. For over fifty years, Athlon
enjoyed steady profits until it fell victim to the global
economic downturn of the late 2000s. In re Fannie Mae 2008
Securities Litigation, 742 F.Supp.2d 382, 391 (S.D.N.Y.
2010) (describing the "well documented" events
surrounding the Great Recession).
Defendant/Appellant Stephen Duggan is a certified public
accountant and an executive with magazine publishing
experience. After learning of Athlon's financial
difficulties, Mr. Duggan conceived a turnaround plan for the
company. He proposed a monthly sports publication called
"Athlon Sports, " which would be inserted
and distributed in newspapers. Like Athlon's other sports
publications, the proposed insert would generate revenues
through advertising sales.
March 2010, Athlon accepted Mr. Duggan's proposal and
hired him to implement the Athlon Sports
newspaper-insert project. In addition, Mr. Duggan invested
$1.5 million in the company and in return received 15% of the
company's ownership shares, or 222, 100 shares of Athlon
stock. He was also eligible to receive additional shares of
restricted stock amounting to an additional 10% ownership in
Athlon; the number, timing, and vesting of the restricted
shares were based upon EBITDA (earnings before interest,
taxes, depreciation, and amortization) performance targets
from 2010 to 2014.
the same time, Athlon retained a CPA firm, Lattimore Black,
Morgan & Cain ("Lattimore Black"), to conduct a
valuation of Athlon. The valuation was obtained in part to
establish a basis price for Mr. Duggan's restricted
shares for tax purposes. The valuation was intended to be
available for other purposes as well, since there had been no
valuation of Athlon since its business began to decline.
report dated April 22, 2010, Lattimore Black placed
Athlon's enterprise value at $8.1 million. It determined
that the fair market value of Athlon's common share
equivalents was $1.85 per share, and the fair market value of
the restricted stock was $.98 per share. Lattimore
Black's valuations were based in part on probability
estimates of the success of the Athlon Sports
the next several months, Athlon secured the new
infrastructure necessary to support the Athlon
Sports newspaper-insert project. It found a manufacturer
for the insert, negotiated contracts, and made other
preparations for the new endeavor. Finally, the Athlon
Sports launch took place in October 2010. It was a
success, and Athlon Sports became a
nationally-distributed sports magazine with a monthly rate
base of 7 million copies. During 2011, while Mr. Duggan was
still President and CEO, the Athlon Sports rate base
grew to over 9 million copies per month, a figure that was
touted in Athlon company documents. Media Industry Newsletter
named Mr. Duggan 2011 Publisher/CEO of the Year.
the increased circulation and other successes did not
translate into higher advertisement revenue for Athlon; the
ad revenue lagged substantially behind pre-launch
projections. This precipitated a significant cash-flow
shortfall for Athlon.
raise the capital necessary for payroll and other operating
expenses, Athlon was forced to take extraordinary measures.
By October 2011, a year after the launch of Athlon
Sports, Athlon had sold its main asset-the building that
had housed the business for twenty years-for about $3.9
million. The building had served as the collateral for
Athlon's approximately $1 million line of credit, so the
proceeds of the sale were used to pay off the line of credit.
The remaining proceeds of the building sale were retained for
working capital and to fund the ongoing business. All of
Athlon's key employees, except Mr. Duggan, took pay
cuts. As a further measure, Athlon surrendered
its key-man life insurance policies on seventy-five-year-old
Spencer Hays, the chairman of the board and controlling
shareholder. This decision relieved the company from the
obligation of paying the hefty insurance premiums and also
allowed it to recover the cash value of the
parties dispute whether Mr. Duggan was hindered from pursuing
outside capital to address Athlon's cash flow issues
during early 2011. Regardless, it is undisputed that,
beginning in October 2011, Mr. Duggan was permitted to do so.
connection with his effort to seek outside capital, Mr.
Duggan oversaw the preparation of a Confidential Information
Memorandum (CIM) for Athlon to use to attract would-be
investors. In the CIM, the projections for Athlon's
future were quite optimistic: "Based on the investments
made since 2010, Athlon is poised for strong multi-year
double-digit revenue growth." The CIM also asserted that
Athlon was "forecasted to generate total revenue of
$14.3 million in fiscal 2012, which represents year-over-year
growth rate of 34.6%." Despite these rosy forecasts, the
record shows that, by the time the CIM was prepared,
Athlon's financial circumstances had deteriorated
November 28, 2011, at a board of directors meeting, Athlon
effectively terminated Mr. Duggan's employment. Mr. Hays
asked Mr. Duggan to resign as CEO of Athlon, and Mr. Duggan
did so. However, after resigning from his employed position,
Mr. Duggan remained on Athlon's board of directors.
that same time, Mr. Hays, along with Charles Allen (chief
operating officer) and Mary Dunn Vanderkooi (chief financial
officer), formed an Ad Hoc Strategic Alternatives Committee
("the Committee") to explore options for returning
Athlon to profitability. The Committee devised a so-called
"Plan of Merger" to form a new corporation. Under
the merger plan, Athlon would merge with a newly-created
Tennessee corporation, Athlon Merger Subsidiary, Inc.
("Merger Sub"). Another newly-created Tennessee
corporation, Athlon Acquisition, Inc. ("Newco"),
would be the sole shareholder of Merger Sub. After completion
of the planned merger, the separate Merger Sub would cease to
exist, leaving the Newco, also referred to as "New
Athlon, " as the only surviving corporation. Shares in
New Athlon would be purchased via proportional investments by
Mr. Hays and certain other Athlon employees. Under the merger
plan, the total investment in the new corporation was
expected to be $2 million, which was to provide a much-needed
infusion of capital for New Athlon's ongoing business.
Plan of Merger contemplated that some Athlon shareholders
would not be invited to participate in the new
corporation. For this reason, the Committee anticipated
that some shareholders would dissent from the planned merger.
Accordingly, for the purpose of determining the value of
dissenting shareholders' stock, the Committee sought a
new valuation of Athlon prior to the planned merger. The
Committee retained Michael Collins at 2nd Generation Capital,
an investment firm in Nashville, Tennessee, to perform the
Collins completed his valuation of Athlon by February 29,
2012. In it, Mr. Collins opined that the fair market value of
the company was "$NIL, " meaning zero. Mr. Collins
also rendered a fairness opinion. In his fairness opinion, he
recommended that all shares of Athlon stock not converted
into shares of the new corporation be canceled and that the
owners of those shares be compensated at the rate of 1¢
March 2012, the Athlon board of directors convened three
times. Over the course of those meetings, Mr. Collins
presented his valuation of Athlon, and Mr. Hays presented the
Plan of Merger. Initially, Athlon offered the recommended
1¢ per share to those not participating in the new
corporation, but this was ultimately increased to $.10 per
share. Mr. Hays' proposed Plan of Merger was accepted by
Duggan was not invited to participate in ownership of the new
corporation. Along with Mr. Duggan, the other
Defendants/Appellants in this appeal, minority shareholders
Daniel R. Grogan and Robert Kelly Grogan, were also not
invited to participate in the new corporation. Although the
plan was not described as a "squeeze out" or
"take out" merger, this was in fact its effect on
Mr. Duggan and the other shareholders who were not invited to
participate in the new corporation.
August 10, 2012, the planned merger was consummated. Pursuant
to the Tennessee dissenters' rights statutes, Tennessee
Code Annotated sections 48-23-101, et seq.,
Athlon was required to compensate Mr. Duggan, the Grogans,
and the other non-participating shareholders for the fair
value of their shares.
October 2012, Mr. Hays, on behalf of Athlon, sent the
dissenting shareholders a fair value payment check for $.10
per share plus interest. Mr. Duggan and the Grogans, rejected
the offer and demanded $6.18 per share. See
Tenn. Code Ann. § 48-23-209 (2012). Their demand was
rejected. After reaching an impasse, Athlon filed the instant
lawsuit against Mr. Duggan and the Grogans for judicial
appraisal of "the fair value of the shares and accrued
interest" as of the date of the merger pursuant to
Tennessee Code Annotated section 48-23-301
matter was tried before the Honorable Ellen Hobbs Lyle over
the course of six days in August and September 2015. The only
issue at trial was the fair value of Athlon stock at the time
of the August 2012 merger.
trial court heard testimony from several lay witnesses on
Athlon's operations and the events leading up to the
merger. The witnesses included Mr. Allen and Ms. Vanderkooi,
as well as Mr. Duggan and the Grogans. In connection with the
witnesses' testimony, about 160 exhibits were submitted.
The primary evidence, however, was the testimony of the
parties' competing experts. They testified extensively on
the fair value of Athlon stock at the time of the merger, and
presented detailed reports and exhibits as well.
valuation expert hired by Athlon in advance of the merger,
Mr. Collins, gave expert testimony on behalf of
Athlon. In his Trial Report and his testimony,
Mr. Collins explained the methodologies he employed, the
evidence he considered, and the assumptions he made in
forming his expert opinion on the fair value of Athlon stock.
He relied to a great extent on the valuation he performed for
Athlon in February 2012, updated to the time of the August
2012 merger. Regarding the valuation methodologies used, Mr.
Collins' Trial Report stated:
I have employed the Delaware Block Method of valuation
compliant with the requirements of TENNESSEE CODE ANNOTATED
Title 48 Corporations and Associations For-Profit Business
Corporations Chapter 23 Dissenters' Rights and relevant
Tennessee court precedents. Plaintiff's counsel assisted
my familiarization with the applicable law, regulation[s],
rules, and other relevant legal principles. . . .
In conducting my work, I have applied the Delaware Block
Method as required; and have also separately considered (and
applied where I determined them to be applicable and their
results reasonable without resorting to undue speculation)
multiple techniques or methods that are generally considered
acceptable in the financial community and appraisal
profession considering all relevant factors. I present these
multiple approaches in order to best inform the [Trier] of
Fact and to serve as a reasonableness cross check of my
calculations and opinions.
Collins' Trial Report also included a disclaimer about
the Delaware Block method of valuation: "Generally
accepted appraisal practice, as well as Delaware and other
courts, reject the Delaware Block [method] as unreliable and
not in accordance with modern valuation science." It
noted the "recognized shortcoming" of the Delaware
Block method, namely, that it looks to a company's
historical operating results and then uses simple
mathematical averaging formulas that "can yield highly
misleading results, " oftentimes a lower valuation for
the dissenting shareholder. Modern methods of valuation such
as the Discounted Cash Flow (DCF) approach, Mr. Collins'
Trial Report stated, "place more emphasis on a
company's future prospects to the extent that they can be
reasonably forecasted without resorting to undue
case, Mr. Collins concluded that the fair value of Athlon
stock at the time of the merger was zero or "$NIL"
under either the Delaware Block method or alternate,
forward-looking, valuation methods. Mr. Collins explained
that, at the time of the merger, "Athlon was insolvent
or at the minimum operating in the Zone of Insolvency with
unreasonably small capital. Athlon's liabilities were
highly likely to exceed its assets and thus the interest of
creditors as well as the equity interests would be
impaired." He further opined that, "absent the
external funding provided by the [merger], it would not be
possible for Athlon to achieve the liquidity necessary to
compensate a Dissenter." Mr. Collins felt that the DCF
valuation method was "not practical, useful, or reliable
when projections of future results cannot be made without
resorting to undue speculation."
witness Jaime C. d'Almeida testified on behalf of the
dissenting shareholders about the value of their
stock. Mr. d'Almeida also used the Delaware
Block method based on Tennessee law, even while describing
that method as "not currently a common valuation
method." Because the Delaware Block method is not
commonly used, Mr. d'Almeida used two other valuation
methods-the guideline companies method and the DCF method-to
benchmark his Delaware Block method appraisal.
the Delaware Block method, Mr. d'Almeida valued the fair
value of the dissenting shareholders' stock at $6.48 per
share. Using the guideline companies method,
under which Athlon was compared to publicly-traded companies
in similar lines of business, Mr. d'Almeida determined
that the fair value of Athlon stock would be in the range of
$4.55 to $9.58 per share. Under the DCF method of valuation
based on Athlon's February 2012 projections, Mr.
d'Almeida valued the stock at $6.48 per share. Finally,
using the DCF method based on the projections included in the
CIM, Mr. d'Almeida placed the fair value at $22.32 per
Collins submitted a Rebuttal Report in which he challenged
the assumptions and methods Mr. d'Almeida used. Mr.
Collins' Rebuttal Report described Mr.
d'Almeida's valuation as "speculative, based on
conjecture and fail[ing] to adequately support the Defendant
dissenters' claim for Fair Value[, ] . . . and
contain[ing] numerous fundamental flaws." The Rebuttal
Report detailed Mr. Collins' criticisms of Mr.
d'Almeida's report and his deposition testimony in a
closely considering the evidence, in October 2015, the trial
court entered a final order in which it concluded that the
fair value of the dissenting shareholders' stock at the
time of the merger was "no greater than the $0.10 per
share amount paid by [Athlon]." At the outset, the trial
court stated, "As well explained in the trial briefs of
each attorney in this case, Tennessee uses the Delaware Block
method to determine fair value for dissenters."
Athlon Sports Commc's, Inc. v. Duggan, No.
M2015-02222-COA-R3-CV, 2016 WL 6087667, at *3 (Tenn. Ct. App.
Oct. 17, 2016) (hereinafter referred to as "Athlon
Sports") (quoting trial court decision), appeal
granted (Tenn. Mar. 9, 2017). It explained: "While
there is this [Delaware Block] formula under Tennessee law,
the ultimate value of the stock is not formulaic. The
[Delaware Block] formula is a tool to assist [in] rendering a
judgment of share value customized to the unique features and
facts of individual companies." Id. (quoting
trial court decision).
trial court specifically credited the testimony of Mr.
Collins and discredited the testimony of Mr.
d'Almeida. Id. at *6-9. The trial court
then outlined its reasons for finding that the fair value of
the Athlon shares was no more than $.10 per share:
The reason the Court finds the value to be $0.10 and not the
zero determined by Mr. Collins is that the evidence
established that Athlon's trade name had existed for 44
years and had obtained recognition. The evidence established
that while this recognition was not of such an extent that it
could be used as collateral or be sold for an appreciable
amount or had a trademark value, it had some very, very
minimal value as an intangible asset. Also, the $9 million
[sic] in circulation of the Sports Insert (discussed in more
detail below), the Court finds, had some very, very minimal
asset value. Given the great disparity between advertising
revenue, which was still insufficient, and circulation, and
absence of Company assets and earnings, there was great
uncertainty and risk as of the August 2012 Merger date. The
Court finds there was not just a liquidity or cash flow
problem; the Company was hovering around the zone of
insolvency. Thus, the Court finds that the recognition of the
Athlon name or brand and the [ ]9 million in circulation,
while very, very minimal, provide a $0.10 per share value.
Id. at *6. The dissenting shareholders appealed.
Court of Appeals, the dissenting shareholders argued that the
trial court erred in relying exclusively on the Delaware
Block method for determining the value of their Athlon
shares. The appellate court identified the dissenting
shareholders' "chief objection to the Delaware Block
Method" as "their claim that [the method's]
focus on past rather than prospective performance is
particularly unreliable for a company embarking upon a new
venture like Athlon." Id. at *10.
Alternatively, the dissenting shareholders argued that, even
if the Delaware Block method were the proper valuation method
for the shares of Athlon stock, the trial court erred in how
it applied that method under the facts and circumstances of
this case. Id. at *9.
Court of Appeals rejected both of those arguments. As to the
first issue, the appellate court held that "[t]he Trial
Court correctly followed Tennessee case precedent in
utilizing the Delaware Block Method for valuation, "
referring to this Court's holding in Blasingame v.
American Materials, Inc., 654 S.W.2d 659 (Tenn.
1983). Id. at *11. Blasingame
adopted the Delaware Block method for determining share value
in a dissenter's rights case. Blasingame, 654
S.W.2d at 667. The Court of Appeals noted that
Blasingame adopted the Delaware Block method even
though the Delaware Supreme Court that originally adopted
that method had ended up criticizing it:
Our Supreme Court's 1983 decision in Blasingame
adopting the Delaware Block Method never has been revisited
or overturned by our Supreme Court. In Blasingame,
our Supreme Court acknowledged the Delaware Supreme
Court's decision in Weinberger which was
critical of the Delaware Block Method, yet adopted that
method nevertheless. While the Tennessee case law available
to the Trial Court and to us in the years since
Blasingame has refined further the approach to
judicial valuation, it never has departed utterly from the
Delaware Block Method as a baseline.
Athlon Sports, 2016 WL 6087667, at *11 (referencing
Weinberger v. UOP, Inc., 457 A.2d 701, 712-13 (Del.
1983)). Based on Blasingame, the intermediate
appellate court approved of the trial court's adherence
to the Delaware Block valuation method, even though Delaware
itself has "long since departed from a strict
application of" that valuation method. Id. at
*10. The Court of Appeals added that, "[i]f the holding
of Blasingame . . . is to be reversed or modified by
a Tennessee Court, ...