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Athlon Sports Communications, Inc. v. Duggan

Supreme Court of Tennessee, Nashville

June 8, 2018


          Session October 11, 2017

          Appeal by Permission from the Court of Appeals Chancery Court for Davidson County No. 12-1787-III Ellen H. Lyle, Chancellor

         We 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.

         Consequently, we remand to the trial court to reconsider its determination on valuation in light of our decision to partially overrule Blasingame.

         Tenn. R. App. P. 11 Appeal by Permission; Judgment of Court of Appeals Reversed; Judgment of Trial Court Vacated; Case Remanded to Trial Court

          John R. Jacobson and W. Russell Taber III, Nashville, Tennessee, for the Defendant/Appellants, Stephen C. Duggan, Daniel R. Grogan, and Robert Kelly Grogan.

          Paul S. Davidson and Laura P. Merritt, Nashville, Tennessee, for the Plaintiff/Appellee, Athlon Sports Communications, Inc.

          Holly 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.



         Factual and Procedural Background[1]

         Plaintiff/Appellee 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.[2] 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.[3] 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.

         In 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.[4]

         Around 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.

         In a 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.[5] Lattimore Black's valuations were based in part on probability estimates of the success of the Athlon Sports project.

         Over 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.

         Unfortunately, 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.

         To 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.[6] 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 policies.[7]

         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.

         In 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 substantially.

         On 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.

         Around 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.

         The Plan of Merger contemplated that some Athlon shareholders would not be invited to participate in the new corporation.[8] 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 valuation.[9]

         Mr. 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¢ per share.

         During 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 the board.[10]

         Mr. 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.[11] 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.[12]

         On 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.

         In 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.[13] 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[14] 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 (2012).[15]

         The 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.[16]

         The 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.

         The valuation expert hired by Athlon in advance of the merger, Mr. Collins, gave expert testimony on behalf of Athlon.[17] 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.

         Mr. 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 speculation."

         In this 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."

         Expert witness Jaime C. d'Almeida testified on behalf of the dissenting shareholders about the value of their stock.[18] 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.

         Under the Delaware Block method, Mr. d'Almeida valued the fair value of the dissenting shareholders' stock at $6.48 per share.[19] 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 share.

         Mr. 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 line-by-line fashion.

         After 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).

         The trial court specifically credited the testimony of Mr. Collins and discredited the testimony of Mr. d'Almeida.[20] 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.

         In the 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.

         The 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).[21] 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, ...

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