On certification to the Superior Court, Appellate Division, whose opinion is reported at 315 N.J. Super. 32 (1998).
The opinion of the court was delivered by: Garibaldi, J.
In this appeal, we consider how a court in a statutory appraisal action should determine the "fair value" of the shares of stock held by Dissenting shareholders in a family-held corporation. Specifically, in calculating "fair value" should the court apply a discount reflecting the lack of marketability or non-marketability of those shares ("marketability discount"). We also determine whether the "extraordinary circumstances test" set forth in 2 ALI, Principles of Corporate Governance: Analysis and Recommendations, ¶ 7.22(a), at 302; comment e to ¶ 7.22, at 313 (1994) (2 ALI Principles) is applicable, and whether the trial court should have reopened the record to consider the affect of a subsequent merger when calculating the "fair value" of the stock.
This appeal arises out of a dispute over the management of a family business that began as a one-man glass works and evolved into a multi-national corporation that manufacturers glass, plastics and scientific equipment. Strasenburgh v. Straubmuller, 146 N.J. 527, 531-32 (1996). Lawson Mardon Wheaton, Inc., formerly Wheaton, Inc. (Wheaton or the Company) was founded in 1888 by Dr. Theodore C. Wheaton. Until December 1991, the company was a privately-held, family controlled business, governed by a Board of three directors, each of whom represented one of the three branches of the Wheaton family. In 1996, the company was sold to Alusuisse-Lonza Holding Ltd., (Alusuisse), a Swiss holding company.
Until 1991, Wheaton stock was one hundred percent family owned. The Board of Directors consisted of Frank H. Wheaton, Jr., Edward C. Wheaton, and George Straubmuller, the descendants of Dr. Wheaton's three children. Over the years, the presidency of the Company had passed from the founder's eldest son, down to his eldest son, and so on, until Frank H. Wheaton, Jr. became president. In March 1990, Frank H. Wheaton, Jr., the long-time President of Wheaton resigned amidst controversy. In January, 1991, under pressure from the other directors, he took a leave of absence as Chairman of the Board of Directors. Later that year, the Board failed to renominate him and he was forced out as a director of the Company. Robert Veghte, a member of the Straubmuller branch of the Wheaton family, was appointed President and Chief Executive Officer of Wheaton. By 1991, no member of the Frank H. Wheaton, Jr., branch of the family was employed by the Company and one branch of the Straubmuller branch, the Strasenburghs, were not employed by the Company.
When he was forced out of the Company in 1991, Frank H. Wheaton, Jr. sold 100,000 shares of his stock to a British company, Bowater PLC, for $64.00 per share. In August 1991, Bowater secured option agreements to purchase an additional 17.7 percent of Wheaton stock at $64 per share. Bowater also made a conditional offer to management to buy all the Company's stock at $64.00 per share.
Although Bowater's negotiators were authorized to pay up to $70.00 a share, the Company believed the stock was worth more. Therefore, on August 28, 1991, the Wheaton Board of Directors rejected the Bowater offer and unanimously adopted a resolution stating that the Company was not for sale. On that same day, seventy-one percent of the Wheaton shareholders approved a "Shareholder Liquidity Plan" and a voting trust, restricting any further sales of Wheaton stock outside the family unless approved by seventy-five percent of the shareholders and five of six members of a shareholder committee.
In November 1991, in an attempt to further restrict future public sales of Wheaton stock, the controlling family members approved a plan to restructure the corporation. Under the plan, Wheaton would transfer substantially all of the company assets to three newly-created wholly owned subsidiaries in exchange for all of the subsidiaries' capital stock. The new stock consisted of two classes: Class "A" stock, which could not be sold to anyone outside the family; and Class "B" stock, which could be sold freely, but only carried one vote to Class A stock's ten votes.
On December 6, 1991, the Company formally announced the restructuring. It advised shareholders who did not approve of the plan that they had a right to Dissent from the corporate action and demand payment of the "fair value" of their shares under N.J.S.A. 14A:11-1 to -11 (Appraisal Statute) of the New Jersey Business Corporation Act, (BCA), N.J.S.A. 14A:1-1 to-16-4.*fn1 Twenty-six shareholders*fn2, owning approximately fifteen percent of Wheaton's stock, (the Dissenters)*fn3, formally Dissented from the plan and demanded fair value payment for their shares pursuant to the appraisal statute.
In late January 1992, Wheaton retained First Boston, Inc. (First Boston), an investment banking firm, to prepare a fair value appraisal of the Company. First Boston computed a fair value range between $39.49 and $42.53 per share. First Boston arrived at this range by calculating a fair trading value range of $52.65 to $56.70 per share and then applying what it viewed to be a minimum non-marketability discount of twenty-five percent. The company ultimately offered the Dissenting shareholders $41.50 per share. Wheaton's Chairman testified that the Company made an offer in the upper range since they were all family. The Dissenters rejected the offer and in April 1992, the Company initiated the present appraisal action in the Chancery Division.
In June 1995, three years later and two months before trial was to begin, the Company voted to rescind the 1991 corporate restructuring that had triggered the Dissenting stockholders' appraisal rights. Wheaton then moved to dismiss the appraisal action (rescission motion). The Chancery Division denied that motion, and the Appellate Division denied leave to appeal. During the course of trial, Wheaton appealed the Appellate Division decision to this Court.
Meanwhile, as the trial was proceeding, the Legislature amended the BCA. The type of corporate restructuring that Wheaton undertook, an intracorporate transfer of assets from a parent corporation to wholly-owned subsidiaries, would no longer trigger Dissent and appraisal rights. N.J.S.A. 14A:10-11(4), 11-1(1)(b) (as amended by L. 1995, c. 279, § 16, § 21, eff. Dec. 15, 1995). Shortly after the new law became effective, Wheaton renewed its motion to dismiss the appraisal action. It contended that the amendments applied retroactively, thereby terminating the Dissenting shareholders' rights to the fair value of their stock (retroactivity motion). The trial court denied the motion and continued taking testimony in the appraisal action until its Conclusion on February 26, 1996.
On April 24, 1996, we 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. That case was argued before this Court on April 29, 1996. One day later on May 1, 1996, Wheaton announced "an acquisition merger" with Alusuisse, effective April 29, 1996.
Under the merger, Wheaton shareholders would receive $63.00 per share for their Wheaton stock. Alusuisse also asked Wheaton's counsel to withdraw its appeal in the appraisal matter. We observed that the "decision to withdraw the appeals undoubtedly stem[med] from Alusuisse-Lonza's belief that the fair value of the shares when surrendered in 1991 was lower than the 1996 acquisition price of $63.00." Strasenburgh, supra, 146 N.J. at 537.
We affirmed the trial courts' rulings on the rescission and retroactivity motions. Id. at 545.*fn4 We remanded the case to the Chancery Division to determine the "fair value" of the Dissenters' stock, directing "the trial court . . . in its discretion to reopen the record in the appraisal proceedings for consideration of events that have transpired since the hearing closed." Ibid.
During the original appraisal action in 1995, the court heard testimony from the parties' respective valuation experts: George Weiksner, a managing director and Chairman of First Boston's investment banking committee, testified on Wheaton's behalf; Mark Lee, managing director of Bear Stearns and Co., Inc.'s investment banking department, testified on the Dissenters' behalf.
As the courts below recognized, both experts used essentially the same methodology in determining the "liquid" or "free trading value" of Wheaton's stock.*fn5 Both experts analyzed and compared Wheaton's financial data with that of five comparable public companies to impute a multiple or price/earnings ratio for Wheaton. Both arrived at a price earnings ratio of about 13.5 times earnings. Both then multiplied that ratio by their estimate of Wheaton's 1992 earnings per share to determine the price per share. Both experts selected the same five companies for analysis and comparison, although the Dissenters' expert used an additional two. Both agreed that The West Company, Inc. was most similar to Wheaton.
The experts, however, disagreed on two major points. First, the experts disagreed on the projected earnings calculation. The Dissenters' expert accepted and applied Wheaton's 1992 projected earnings estimate of $23.8 million; Weiksner reduced that projection to $20.5 million to account for the Company's failure to meet its projections in previous years. The trial court accepted the reduction, termed "the haircut," because it "lacked confidence" in Wheaton's projections and believed Weiksner's estimate was more consistent with previous actual earnings. The Dissenters have not pursued that issue.
The second area of contention, and the primary issue in the case, is the applicability of a "marketability discount" to the liquid traded value range. As stated in its report to Wheaton, First Boston determined the fair value of the Dissenters' stock as follows:
"Based upon the trading multiples of the comparable companies, the historical and financial performance of Wheaton versus the comparables, and taking into account the factors affecting value delineated above, First Boston estimated the liquid trading range for Wheaton common stock on December 5 to be 13.0x-14, or $52.65 to $56.70 per share. To reflect that Wheaton is a private company without a readily accessible liquid trading market, First Boston then applied a twenty-five percent discount of $13.16 to $14.17, and an additional five percent discount due to the Company's share ownership, restrictions on stock transfers, and control issues, or an additional discount of $2.63 to $2.84. First Boston believed the fair value of the shares, taking into account those discounts, is $36.86 to $39.69."
Bears, Stearns declined to apply a marketability discount, concluding that the pro rata equity valuation method was more appropriate to determine the fair value of Wheaton's stock. Under that method, the corporation is valued as an entity. The company's equity value is then allocated in proportion to each shareholders' interest. Lee, relying on Delaware courts' approach in appraisal actions, concluded that the pro rata method is more appropriate because it treats shareholders ...