Tennessee Supreme Court Adopts Modern Valuation Methods For Dissenting Shareholder Disputes

In a case involving dissenting shareholders forced out of a closely held corporation in Nashville, the Tennessee Supreme Court has overruled its prior case law and adopted a standard that will allow trial courts to use modern methods such as discounted cash flow to determine ” fair value” of dissenting shareholders stock.

Under Tennessee ” dissenters rights ” laws, when dissenting shareholders are forced out of a closely held corporation, the corporation must pay them the “fair value” of their stock. Should the dissenting shareholders disagree with the amount the corporation proposes to pay, the corporation can then file a lawsuit to ask the court to determine the fair value of the stock.

In the case before the court, Athlon Sports Communications, Inc. marketed special interest publications and memorabilia. Athlon enjoyed steady profits until it fell victim to  the economic downturn in the late 2000’s.  The corporation in 2010 hired executive Stephen Duggan, who created a turnaround plan  for the company.  The turnaround plan successfully generated increased circulation of Athlon’s sports publications but did not lead to increased profits.

In the fall of 2011, the corporation’s financial circumstances had become dire.  In an effort to become profitable, the board of directors in early 2012 approved a plan of merger.  Some of the dissenting shareholders which included Mr. Duggan were forced out. Athlon offered to pay the dissenting shareholders 10 cents per share as the fair value of their stock shares: they disagreed and claimed their shares were worth much more. Athlon then filed a lawsuit asking the Davidson County Chancery Court to determine the fair value of the dissenting shareholders stock shares.

After a trial, the chancery court held that  the dissenters stock  was worth 10 cents per share.  The court in rendering this decision relied on a 1983 Tennessee Supreme Court case that adopted the ” Delaware Block Method ” of stock valuation ( Blasingame v. American Materials Inc. 654 S.W. 2D 659 ( Tenn. 1983). This valuation method is called the “Delaware Block Method” because from the 1950’s to the early 1980’s, it was the exclusive method  used for valuing stock by the Delaware courts which are well known for their expertise in corporate law.  Stephen Duggan appealed this decision and the Court of Appeals affirmed the trial court’s ruling.

The Tennessee Supreme Court accepted this case for appeal and in its decision , discussed the valuation methods that can be used to determine the fair value of a dissenting shareholders stock. The court noted that Delaware courts have largely discontinued use of the traditional Delaware Block Method of valuation. Delaware courts now favor more  modern valuation methods that take into account projected future profitability of a merged corporation  such as the discounted cash flow method. The Tennessee Supreme court pointed out that most states now use more forward- looking methods of valuation. The Court them remanded the case to the trial court to give that court the opportunity to reconsider the valuation of the dissenting shareholder’s stock in Athlon.

You can read the unanimous decision of the Tennessee Supreme Court in Athlon Sports Communications, Inc. v. Stephen C. Duggan authored by Justice Holly Kirby, go to the opinions section of  TNcourts.gov.