On appeal from the Superior Court of New Jersey, Chancery Division, Union County, C-180-97.
Before Judges Eichen, Steinberg and Weissbard.
The opinion of the court was delivered by: Steinberg, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
These appeals were argued on the same day and are interrelated. Accordingly, for ease of disposition, we consolidate them for purposes of this opinion. The genesis of the litigation that led to these appeals is a decision by Amboy Bancorporation to address its concern that it had substantial excess capital that was not earning the same returns as its operations. It decided to address the problem through a corporate reorganization that included an election to be taxed as a Subchapter S corporation. In these appeals we are called upon to decide novel questions regarding the right of a shareholder who voted against the plan, but then cashed in his or her shares for the price offered by the corporation to subsequently challenge the method of evaluation, or the price offered; the applicability of marketability and minority discounts to the value of the stock; the applicability of a control premium to the value of the stock; and the right of a non-statutory dissenter to an award of counsel and expert fees.
Defendant Amboy National Bank's predecessor in-interest was established in 1888 in South Amboy. In order to provide greater management flexibility, Amboy Bancorporation was formed in 1984 to serve as bank holding company, a shell with one class of stock and one subsidiary, Amboy National Bank, that conducted its business in thirteen branches in Central New Jersey.*fn2 Transactions in Amboy stock were handled by "market-makers" instead of through public trading on a stock exchange.
In 1994 and 1995, Amboy paid a special dividend of $1.00 per share, which amounted to about $3,000,000 each year. As of June 30, 1997, Amboy had total assets of about $1,112,601,000, deposits of about $896,849,000, and shareholders' equity of about $135,208,000. Its net income was approximately $18,931,000 for 1996, and $10,467,000 for the first half of 1997. During the relevant period, Amboy had 420 shareholders.
Because Amboy was extremely successful, it generated far more profits than it needed as capital to continue its operations. In essence, Amboy was accumulating capital at a much higher rate than the growth rate of its assets. Accordingly, the return on equity was decreasing. Amboy developed a strategic plan which called for maintaining a return on equity of fifteen percent as its justification for continuing in the banking business. Eliminating excess capital would have required a special dividend of $25 to $50 million which, according to Amboy, was unheard of for community banks. Rather, a bank tries to employ such capital to buy other banks. Indeed, Amboy made three unsuccessful attempts to buy other banks.
Amboy's June 1996 strategic plan set forth the goals of achieving a higher return on equity than peer banks, maintaining "a capital position consistent with the minimums established by banking regulatory requirements," and "creating a unique market niche identity." Amboy intended to remain an independent community bank. Amboy would continue to seek "appropriate" banks to purchase, notwithstanding its unsuccessful prior efforts. However, by the spring of 1997, Amboy was still accumulating capital faster than other assets.
In 1996, Congress first offered national banks the opportunity to become Subchapter S entities. Amboy retained experts to aid it in deciding whether to take advantage of the opportunity. Ultimately, Amboy's board of directors decided to pursue Subchapter S status. In order to obtain Subchapter S status, Amboy had to reduce its shareholders base to less than seventy-five qualified shareholders. It retained counsel, tax experts and a valuation expert. One of the reasons for pursuing Subchapter S status was Amboy's belief that it could not solve its excess-capital problem simply by increasing the dividend, because that would subject too much income to double taxation, once at the corporate level and again at the shareholder level.
George Scharpf, Amboy's President, Chief Executive and Chairman of the Board of Directors, attended a conference where he learned more about the effects of electing Subchapter S status. On February 28, 1997, he wrote to Robert Walters, the chairman of Bank Advisory Group, Inc. (BAG) to solicit a presentation of methods of reducing Amboy's excess capital. BAG specialized in advising community banks on valuation, reorganizations, and mergers and acquisitions. Walters made such a presentation at the April 16, 1997 Amboy board meeting.
On May 20, 1997, Scharpf sent Walters a request to "prepare an analysis of the financial effect of repurchasing twenty percent of the outstanding stock of our holding company at a price of $65 and $70 per share." Scharpf chose that price range as representing a ten to fifteen percent premium above the price for Amboy stock that market-makers were quoting at that time. However, Walters denied taking Scharpf's mention of specific figures as a signal of the result Amboy wanted. In addition, Scharpf denied that mentioning those figures to Walters was a signal that Amboy wanted BAG to opine that the value of Amboy stock was within that range. According to Scharpf, he attempted to select a price based upon what he believed "somebody else will pay me for this bank."
At the June 18, 1997 board meeting, the board authorized Scharpf to "proceed with the legal aspects" of the contemplated transaction. In August, 1997, KPMG Peat Marwick provided Amboy with an analysis of the financial, regulatory, and tax consequences of a Subchapter S election. At its August 19, 1997 meeting, the board voted to pursue a Subchapter S election, to devise a plan that would make Amboy eligible to do so, and to set $73 per share as the price for all share transactions.
On September 10, 1997, Amboy sent all shareholders notice of a forthcoming shareholder vote on a proposal to restructure Amboy to qualify for taxation as a Subchapter S status "closed corporation." The notice stated that shareholders currently owning a sufficient number of shares, estimated at 15,000, would continue to be shareholders. Those owning fewer shares would "receive cash in exchange for their shares and cease to be shareholders," unless they took advantage of "the opportunity to purchase additional shares."
On September 16, 1997, Amboy and New Amboy, Inc. executed a merger agreement. New Amboy, Inc. was a shell corporation. Under the plan, Amboy would merge into it and be given the name Amboy Bancorporation. That same day, Amboy's board met and scheduled a shareholder's meeting for November 19, 1997, to vote on the plan. On September 24, 1997, the Office of the Comptroller of the Currency (the COC) approved Amboy's request for the bank to pay a $45 million dividend to the holding company for use in the merger.
On October 24, 1997, BAG gave Amboy a financial fairness opinion in which it concluded that the price of $73 per share was "fair, from a financial standpoint, to all shareholders of the Company, including those shareholders receiving the Cash Consideration . . . ."*fn3 Also on October 24, 1997, Amboy sent to all shareholders of record as of October 15, 1997, notice of a special meeting to vote on the plan. It enclosed a proxy statement, which shareholders were urged to mark and return so that their shares would be "voted in accordance with your wishes." The proxy statement explained that, under the proposed plan, shareholders who did not own the minimum number of shares and did not "perfect their dissenters' rights" would receive $73 in cash for each share they owned. The plan was designed to result in a maximum of fifty-five continuing shareholders. The proxy statement concluded by disclaiming all other representations about the plan or the subsequent "condition or affairs of" Amboy, and urged shareholders to seek independent advice about the legal, business, and tax consequences to them of the plan.
The merger agreement was attached to the proxy statement and incorporated into it. The board approved it unanimously and recommended that the shareholders adopt it as well. Approval required the votes of two-thirds of the number of shares voted at the meeting, with each share being entitled to one vote. The proxy statement also related the board's belief that the offered price "represents a fair value of" the shares. In addition, the proxy statement said that the board had been advised by BAG, which it described as an "independent financial advisor." It further provided that BAG made a "Cash Fair Market Evaluation" as of August 15, 1997, "of approximately twenty percent of the Company Stock." In addition, the proxy statement referred to a "fairness opinion" given by BAG and its conclusion that the $73 price for all transactions was "fair from a financial point of view" to the shareholders. The fairness opinion was included in the materials sent to all shareholders, whereas the cash fair-market evaluation was available for inspection at Amboy's offices. The proxy statement concluded by declaring that the market value and investment value approaches (which were described in the statement), "as discussed above and considered in concert, clearly support the fairness of the $73 per share offer."
Plaintiffs, Kathryn Casey and Sheila Gagliano filed suit in the Chancery Division, Union County, against Amboy Bancorporation, the individuals on its board of directors, and New Amboy, Inc. They alleged that defendants misrepresented the terms of the merger and failed to offer a price that represented the statutorily mandated "fair value" to the detriment of shareholders who were required to sell their shares. They sought to enjoin or rescind the merger and to obtain fair value.
Plaintiff Carol De Sanctis and plaintiff John Everitt filed a class-action complaint in the Chancery Division, Gloucester County, against Amboy Bancorporation, New Amboy, and six of the individual defendants. In their complaint, they made similar allegations about the misleading nature of the merger and the failure to offer fair value, seeking rescission on the basis that the merger represented self-dealing.
Thereafter, plaintiff Thomas Morrissey filed a class-action complaint in the Chancery Division, Union County, against the same defendants that De Sanctis and Everitt had named, making similar allegations.
The three complaints were consolidated for trial in Union County. Susan Hermanos owned enough shares to qualify as a statutory dissenter, and intervened to pursue her statutory right to "fair value." In response to the invocation by Hermanos of her statutory rights as a dissenting shareholder, Amboy filed a complaint in Union County seeking the statutorily mandated hearing to determine the "fair value" of Hermanos' shares.
At trial, Casey testified that she inherited her Amboy stock. She further said that she and Gagliano were sisters. She did not have the financial ability to buy more shares to reach the minimum number and said she was never told that Amboy or Scharpf would have loaned her funds to do so. Nevertheless, she probably would not have taken such a loan, because of the amount. However, she began to question the fairness of the offered price "[o]n the advice of her father." She voted against the plan.
Gagliano also inherited her Amboy shares. She also voted against the plan, and wanted to keep her shares as an investment. She also was unaware that Amboy or anyone on its behalf might lend her funds to buy more shares, but she would not have taken such a loan. She questioned the fairness of the $73 price after discussion with her father.
De Sanctis was a school teacher, with a bachelor's and master's degree, but had no business background. She testified that she did not read the entire proxy statement and did not understand all of the portions that she did read. She had received her Amboy stock as gifts from her parents. She voted against the plan because her parents told her that the "value being given was not fair." She also voted against the plan because she did not want to sell, and probably would have voted against it regardless of the price offered. She did not have the financial resources to buy additional shares in order to reach the minimum number required to remain as a shareholder.
Everitt is De Sanctis' brother. He also received his Amboy stock as gifts from his parents. He read the proxy statement, and on November 6, 1997, he visited Amboy's offices and spent two hours reviewing BAG's evaluation. He understood from reading it that BAG had used both a minority discount and a liquidity discount. He said that based on his review, he "seriously disagreed" with the value that BAG had found. However, he admitted that the proxy statement did not "fool" him away from his conclusions about the fairness of the offered price. He said he was aware that the stock was "$83 bid with no offers prior to the announcement of the price" which meant that although someone was willing to buy the stock at $83 a share, there were no willing sellers. He also said he consulted with Kevin Ryan of Ryan Beck, a market-maker in Amboy stock that had bid $83 for Amboy stock before the proxy statement. Ryan told him that $73 per share was "ridiculous and low" and his partner Roy Beck added that the price was "nowhere near fair value."
In addition, Everitt sent a copy of the proxy statement to Dan Westlake, an expert who ran the Mergers and Acquisitions Department at Principal Securities Corp., and was formerly a governor of the Federal Reserve Board. Westlake opined that the minimum price should have been $125 per share. Westlake disagreed with much of BAG's approach, and considered the plan an example of how banks were using Subchapter S status as "an avenue to squeeze out small shareholders" in a way that Congress had not intended. Westlake also said BAG "is known as a Subchapter S Squeeze-out machine," which confirmed Everitt's impression that the plan was a bad deal. On November 7, 1997, Everitt requested a copy of Amboy's shareholder list and invited some shareholders to a meeting in November 1997, for a presentation by a law firm that he had retained.
Morrissey, a licensed broker-dealer, was a co-owner of a brokerage-dealer firm that was a market-maker for Amboy stock. The brokerage would perform its own due diligence on public information and financial information that it requests of the company, to decide what price to quote for that company's stock. Morrissey did not have access ...