Lawson Mardon Wheaton Inc.
Before Judges King, Muir, Jr., and Cuff.
The opinion of the court was delivered by: Cuff, J.A.D.
 Argued: April 1, 1998
On appeal from the Superior Court of New Jersey, Chancery Division, Cumberland County.
Twenty-six shareholders of closely held Wheaton Inc. invoked their right to an appraisal and purchase of their shares pursuant to N.J.S.A. 14A:11-1 to -11. They had Dissented from a corporate restructuring. Their appeal of the valuation of those shares primarily raises the issue of whether a discount to reflect the lack of marketability of the shares of this closely-held corporation should be applied.
The Wheaton Glass Company was founded in 1888 by Theodore Carson Wheaton. Throughout the years, Wheaton has remained a privately-held, family-controlled business. As shares have been passed down from generation to generation, the number of individual shareholders has increased to 159, and the number of shares to over five million. The dispute in this case involves the third and fourth generation of Theodore C. Wheaton's descendants.
Wheaton's headquarters is located in Millville. The company is a producer of glass and plastic containers, closures and components; tubing products; molded rubber products and aluminum seals; and related scientific and medical products. It serves the pharmaceutical, cosmetic, personal care, scientific/medical and food industries. Its largest customers included Avon, Eli Lilly and Revlon. By 1991, Wheaton's operations were divided into seven groups: glass, plastics, scientific, international, machinery, corporate, and miscellaneous.
Wheaton experienced its best financial year in 1989, as a result of securing a patent on a new type of plastic molding process. However, the company began experiencing significant operational problems in 1990 because of loss of sales in its plastics business and an investigation by the Internal Revenue Service into use of the company's assets by certain individuals. By 1991 the company was having problems passing through price increases to its customers. In addition, in January 1991, Frank Wheaton, Jr., the long-term President of the corporation, took a leave of absence under pressure, and the board of directors appointed Robert Veghte as President and Chief Executive Officer of the company.
Because of the changes in personnel and in the financial climate, in early 1991 management held a series of informal meetings with the shareholders. At these meetings, the third generation shareholders expressed the desire that the company play a greater role in estate tax management. Defendants Frank Wheaton III and James Strasenburgh were particularly vocal on this issue. As a result, Veghte, with board approval, developed a shareholder liquidity plan that was sent to, and approved by, a majority of the shareholders in April 1991. Frank Wheaton III and Strasenburgh did not vote in favor of this plan. Under the plan, shareholders were to receive the required liquidity to pay federal estate and gift taxes; in return, the shareholders agreed to give the company a right of first refusal for any proposed transfer of their Wheaton shares outside the line of Theodore C. Wheaton's descendants and spouses. The board also asked corporate counsel to come up with ideas to allow for further shareholder liquidity. Additionally, around this time, Veghte met with Frank Wheaton III and James Strasenburgh, who indicated their intention to sell their shares. However, while Strasenburgh was willing to sell his shares to the company, Frank Wheaton III wanted to sell his shares to an outside buyer.
At Wheaton's annual meeting on June 11, 1991, Veghte presented several alternatives for providing current liquidity to shareholders. Among the alternatives presented was an employee stock option plan, whereby Wheaton would have incurred approximately $100 million in debt to buy 30% of the common stock of the company at approximately $66 per share. Ultimately, this alternative was rejected because of the significant debt load that the corporation would assume. Other alternatives which were considered and rejected were a declaration of a large, one-time dividend and sale of the entire company to a third party. Another alternative which received considerable interest was a limited initial public offering (IPO), whereby limited voting common shares would be sold to the public so that the Wheaton family would retain control of the company.
In July 1991, the company sent a survey to the shareholders regarding the proposed public offering. Approximately seventy percent of the shareholders responded to the survey. Most expressed interest in the IPO but expressed a reluctance to part with their shares in order to create the offering. As a result of the survey, the company proceeded to solicit bids for an IPO. Three investment bankers made presentations for a limited IPO, with estimates of per share value ranging from $57 to $68. Wheaton chose First Boston Corporation, Inc. (First Boston) to manage the IPO in the event the board decided to so proceed. However, because of ensuing budgetary and environmental problems affecting the company in the second half of 1991, as well as general financial market conditions, plans for an IPO were delayed.
In early August 1991, Bowater, Inc., a British company, purchased 100,000 shares of Wheaton stock from the former Wheaton President, Frank H. Wheaton, Jr., at $64 per share and secured options for an additional 17.66% of the company's common stock. Frank Wheaton, Jr.'s sale to Bowater was the first instance of a sale of Wheaton stock to a non-family member. On August 14, 1991, Bowater made an offer to purchase Wheaton for $64 per share; Bowater's board of directors had authorized a bid as high as $70 per share. The offer was subject to adjustment based upon due diligence and Wheaton's financial results to date in 1991. Soon thereafter, Veghte met with Bowater's principals to discuss the offer. Veghte told Bowater's principals that based on First Boston's IPO price range he believed $64 per share was too low. On August 28, 1991, Wheaton's board of directors rejected the offer and unanimously adopted a resolution stating that the company was not for sale.
On that same date, 71% of Wheaton's shareholders agreed to and signed a shareholder's agreement which restricted the sale of company stock to any outside party unless the transfer was approved by both 75% of the shareholders and five of the six members of a newly-created shareholder committee. No defendant signed the agreement.
On October 3, 1991, Veghte and George Straubmuller met with the chairman of Bowater in London and offered to repurchase its shares at $64 per share plus expenses. Bowater rejected the offer.
In the fall of 1991, Wheaton discovered fraud at one of its whollyowned subsidiaries, American International Container (AIC), which resulted in a financial loss to the Florida subsidiary of $13 million. According to Veghte, this development was an additional reason for Wheaton's failure to proceed with an IPO.
As part of the plans for an IPO, and for certain tax advantages, First Boston advised Wheaton to restructure the company and become a Delaware corporation. Ultimately, however, while Wheaton decided to restructure, only one of its newly-created subsidiaries, a holding company, became a Delaware corporation. Under the restructuring plan, Wheaton would change its name to Wheaton Inc., three new wholly-owned subsidiaries would be formed, Wheaton Science Products, Wheaton Industries, Inc. and Wheaton Holding, Inc., and the company would transfer substantially all of its assets to the subsidiaries in exchange for 100% of each subsidiary's stock. In return for their existing shares, each Wheaton shareholder would be issued recapitalized shares in the new company on a share-for-share basis. On November 20, 1991, the restructuring plan was approved by the board. The board then solicited shareholder approval for the plan. On December 6, 1991, the board received approval of the plan from holders of more than two-thirds of the outstanding stock. On the day prior to adoption of the restructuring plan, defendants, a group of twenty-six shareholders, holding approximately 15% of the company's outstanding five million shares, formally Dissented from the plan pursuant to the appraisal statute and demanded fair value payment for their shares. The dissenting shareholder with the largest percentage of shares is Frank Wheaton III with 4.4%; Frank Wheaton, Jr., is the next largest with 2.6%.
In January 1992, twenty of the twenty-six Dissenting shareholders brought an action (hereinafter, the shareholder action) against Wheaton's board of directors alleging that the directors abused their positions by misappropriating corporate assets and opportunities, misusing company funds, and deflating the value of the company stock. Strasenburgh v. Straubmuller, 146 N.J. 527, 533-34 (1996). Subsequently, the defendants' motion to dismiss the complaint in the shareholders' action was granted on the ground that the shareholders' claims, if valid, were derivative, not direct, claims. Id. at 534-35.
In the latter part of January 1992, Wheaton retained First Boston to conduct a fair value appraisal of the company. First Boston valued Wheaton shares between $36.87 and $42.53 per share. At a meeting of the board of directors on February 28, 1992, it was determined that the company would offer to purchase the Dissenters' shares for $41.50 per share. On March 2, 1992, this offer was communicated to the Dissenters but was not accepted. Rather, the company was asked to proceed with the appraisal action. Accordingly, on April 23, 1992, Wheaton filed a complaint seeking determination of fair value pursuant to N.J.S.A. 14A:11-7 (hereinafter, the appraisal action). On May 26, 1992, the twenty-six Dissenting shareholders (defendants) filed an answer and counterclaim. Because of this litigation, and the fraud in the company's Florida subsidiary, Wheaton was advised by First Boston not to proceed with the IPO.
On March 25, 1993, Judge Francis entered an order, designated as a final judgment for purposes of execution remedies and appeal, granting defendants' motion for an advance of funds of the payment of fair value in the amount of $1.10 per share for the period of January 28, 1992 through January 7, 1993, and $.25 per share on a quarterly basis beginning April 1, 1993. On June 30, 1995, Judge Francis granted defendants' motion to increase, retroactively to September 6, 1994, the advance paid to defendants from $.25 per share to $.29 per share of Wheaton stock held by defendants on December 5, 1991.
In June 1995, Wheaton's board of directors voted to rescind the corporate restructuring which had triggered the appraisal action in an effort to avoid the financial ramifications of a fair value payment because it then appeared to management that the company's financial situation had declined to the point where it could not get financing for the appraisal purchases. Then, Wheaton sought to dismiss the appraisal action, but the trial court denied that motion on June 30, 1995. On August 2, 1995, this court denied Wheaton's motion for leave to appeal that decision.
On August 8, 1995, this court issued a decision in the shareholder action largely reversing the trial court's dismissal of the shareholders' complaint. Strasenburgh v. Straubmuller, 284 N.J. Super. 168 (App. Div. 1995). Trial in the appraisal action had commenced the previous day, August 7, 1995, and continued over thirty dates in August, September, October, November and December 1995, and February 1996.
On December 7, 1995, the Supreme Court granted certification in the shareholders' action. 143 N.J. 324 (1995). In January 1996 Wheaton sought to dismiss the appraisal action based on retroactive application of amendments to the New Jersey Business Corporation Act which eliminated the type of restructuring undertaken by the corporation as a triggering event for the appraisal/purchase statutory remedy. The trial court denied the motion on January 26, 1996.
On April 24, 1996, the Supreme Court granted Wheaton's motion for leave to appeal the denial of the rescission motion and granted Wheaton's motion for direct review of the denial of the retroactivity motion.
On May 1, 1996, Wheaton announced an acquisition merger with Alusuisse-Lonza Holding Ltd. (A-L), a Swiss holding company, effective April 29, 1996, whereby Wheaton shareholders would receive $63 per share from A-L. Strasenburgh, supra, 146 N.J. at 536-37.
On October 23, 1996, the Supreme Court issued its decision in Strasenburgh, supra. In that decision, the Court reversed this court and held that the shareholders' action had to be brought derivatively, id. at 548-55, and affirmed the denial of both Wheaton's rescission and retroactivity motions. Id. at 538-46. With respect to the appraisal action, the Court remanded the matter to the trial court for consideration of the events that transpired after trial in that action had concluded, id. at 545-46, and to "take control of the remaining matters in controversy and conclude them as rapidly as is feasible." Id. at 532.
Pursuant to the Supreme Court's decision, at the end of October 1996, defendants asked the trial court to reopen the record to take account of the merger. Judge Francis denied this motion. On February 28, 1997, Judge Francis issued a written decision. He concluded that the fair value of a share of Wheaton stock as of December 5, 1991, was $41.05, and he awarded simple interest at the rate of 8.24%.
Defendants argue that the trial court abused its discretion by not reopening the record for consideration of the price of Wheaton's 1996 sale in order to demonstrate that the fair value of the company was greater in 1991 than in 1996. In other words, defendants sought to establish that if the company was worth $63 per share in 1996, then it was worth more than that in 1991 when the company's earnings, as reflected by its financial statement, were greater, and that as a consequence, the trial court's per share valuation of $41.05 was far too low. Defendants also point to the fact that the court allowed certain post-December 5, 1991 evidence into the record, namely, the company's financial statement for the year ending in 1991 and the company's budget for the year 1992. They ask that this matter be reversed and remanded for a redetermination of fair value with instructions to reopen the record to consider the 1996 $63 per share acquisition price.
In arguing that the trial court did not abuse its discretion, Wheaton cites the language of the Supreme Court opinion as well as the language of the appraisal statute. In Strasenburgh, supra, the Supreme Court stated:
We direct ... that the trial court be permitted in its discretion to reopen the record in the appraisal proceedings for consideration of events that have transpired since the hearing closed. Specifically, the trial court may take into account the position of Wheaton's directors in the North Jersey litigation that the court in the appraisal proceeding may consider whether the conduct of the directors had artificially depressed the value of the stock.... The court may also consider the company's recent merger in making a just and equitable determination of the appraisal value as of 1991. Before us, the company argued that its financial condition had deteriorated between 1991 and 1996. We realize that the trial court in the appraisal action has determined to limit proofs to the events at the time of the December 1991 valuation. We surmise that these matters of artificial deflation of stock values were fully canvassed in that proceeding and if the court is satisfied to enter judgment on the record before it, it may do so. [Strasenburgh, supra, 146 N.J. at 545-46.] In rejecting defendants' request, Judge Francis cited his prior rulings that the only proofs he would consider as to fair value were those known or knowable as of December 5, 1991. He further stated:
The acquisition price paid by A-L on or about May 22, 1996 was neither known nor knowable as of December 5, 1991. To open the record again to consider the acquisition price and proxy materials, et cetera, would ... in my opinion either force me to reopen the record for any and all events occurring subsequent to December 5, 1991 not known or knowable on that date or just consider one isolated or selective event and then attempt to somehow relate it to what fair value otherwise was as of December 5, 1991.... [I]t seems to me that I made the correct evidential delineation as of the trial and should stick with it now.
To let in the merger price I think would force me to then allow the company to bring in any events that it thinks could somehow be related to December 5, 1991 but again not known or knowable as of that date in ultimately determining fair value as of December 5, 1991. Such a process would certainly not permit me to take control of the case as also directed by the Supreme Court and conclude it "as rapidly as is feasible." Instead [it] would cause me to conduct a renewed hearing for at least a number of days, if not weeks....
Moreover ... to limit the proofs to just the merger price and the proxy materials and the like would place und[ue] emphasis on the $63.00 merger price without any consideration of what part of that price constitutes either a control premium and/or synergies and if I were to reopen the record limited to what the company seeks I would at a minimum have to allow the company to discover from both Wheaton and probably A-L as well, if not more so, what it based its $63.00 price on.
Hence, I deny the Dissenters' motion to reopen the record.
The appraisal statute limits proof as to fair value to the time of the corporate action, and excludes any appreciation or depreciation resulting from the action. N.J.S.A. 14A:11-3(3)(a). Defendants point to the fact that at trial the court allowed into evidence financial statements for the year ending December 29, 1991, Wheaton's budget for the year 1992 and evidence of the financial decline of the company as part of Wheaton's effort to justify its June 1995 rescission of the restructuring. However, for purposes of determining fair value as of early December 1991, there is a great temporal difference between endof-year 1991 financial statements and projected budgets for 1992 and a mid-1996 sale. Defendants concede that the remaining evidence they cite regarding the rescission did not relate to the valuation question. Furthermore, contrary to defendants' arguments, the Supreme Court did not indicate its preference regarding the admissibility of the A-L merger. Rather, it clearly left the reopening issue within the trial court's discretion. Our review of this voluminous and complex record demonstrates no abuse of the discretion reposed in the trial Judge.
The $41.05 share valuation reached by the trial Judge was predicated on two primary factors: application of a 25% lack of marketability discount and fixing the embedded minority discount at zero. All defendants appeal the application of a marketability discount. In addition, defendants Frank Wheaton III and Robert Shaw contend that the trial Judge erred in fixing the embedded minority discount at zero. They insist that the trial Judge was obliged to remove the acknowledged embedded minority discount, thereby raising the value of the stock. We will address each issue separately.
A. THE MARKETABILITY DISCOUNT.
In maintaining that the trial court erred in applying a marketability discount, defendants make the following assertions: most jurisdictions that have considered the issue have rejected such a discount; the discount would create a disincentive for a shareholder to dissent from a corporate action; the trial court's decision places defendants in a subordinate position to the other Wheaton shareholders who received $63 a share when the company was sold; and there was no need for a marketability discount because the company itself was purchasing the shares. Defendants ask this court to reverse the trial court's valuation order and remand the matter for a recalculation of fair value on an undiscounted basis.
Frank Wheaton III and Shaw largely echo this argument. In addition, these defendants contend that in applying the marketability discount the trial court improperly transformed the concept of "fair value" into "fair market value" by injecting marketability concerns into the valuation process, and that application of the marketability discount was contrary to the equitable nature of the appraisal statute by penalizing the Dissenters and rewarding the majority. *fn1
The company maintains that the trial court was correct in applying a marketability discount because the discount reflected the reality of the market for Wheaton's shares, namely, the fact that there was no readily available market for the shares. In support of its position, the company asserts that most states that have considered the issue have applied marketability discounts and that not applying the discount in this instance would punish Wheaton for the illiquidity of its stock and unjustly reward defendants.
Before proceeding to the question of the applicability of the marketability discount, some preliminary observations regarding the appraisal process are in order. The appraisal process for shareholders dissenting from certain corporate actions, with its requisite determination of fair value, came about as a result of the historical growth of the modern corporation. As one court has observed:
The traditional rule through much of the 19th century was that any corporate transaction that changed the rights of common shareholders required unanimous consent. The appraisal remedy for dissenting shareholders evolved as it became clear that unanimous consent was inconsistent with the growth and development of large business enterprises. By the bargain struck in enacting an appraisal statute, the shareholder who disapproves of a proposed merger or other major ...