Blasingame Case Sets Standards for TN Business Valuation
Tennessee business valuation law case summary. Tennessee divorce and family law from the Supreme Court of Tennessee.
Author’s note: Blasingame marked the beginning of the modern era in Tennessee business valuation law. Most cases cite Blasingame for its basic analysis of Tennessee law.
The Supreme Court of Tennessee was asked to review a judgment that awarded Larry Blasingame $429,000 for the fraudulent breach of his oral employment contract. That award was affirmed by the court of appeals. At issue with the supreme court was the measure of damages where the valuation of a minority stock interest in a closely held corporation was required.
Robert S. Doggett and Melvin Cornwell organized American Materials, Inc., which produced emulsified asphalt and concrete for sale. The two hired Blasingame in 1969, who said he was to receive a salary, an annual bonus, and that he would be allowed to purchase 300 shares of stock in the corporation for $25,000. Blasingame was terminated from the company in 1975. Doggett died in September 1976. Blasingame filed the breach of contract suit in January 1977, and the case was tried in June 1978. In November of that year, the trial court ruled that instead of the actual value of 300 shares, Blasingame was entitled to the actual value of 25% of American Materials as of November 10, 1978 and was also entitled to the same bonuses that other stockholders were paid through 1975 when Blasingame was fired.
A master found the value of 25% of the corporation as of November 10, 1978, to be $324,988 less the $25,000 purchase price, and that stockholders received $22,000 through calendar year 1975 while Blasingame received only $18,000. At trial, three CPA’s testified for Blasingame that the value of 25% of American Materials was $672,500, $657,572, and $660,419.68, respectively. The corporation’s CPA calculated the value of 25% corporation by three different methods resulting in sums of $115,350, $127,033, and $165,670. The trial court master averaged the highest opinion value of $672,500 and the lowest of $115,350 and applied a 17.5% discount due to the limited marketability of a minority interest in a closely held corporation. In total, the trial court decided that Blasingame was entitled to a judgment in the sum of $303,988.
Both parties filed exceptions to the master’s report, and the trial court held that it was improper to arrive at the actual value of the stock of the corporation by averaging the expert testimony. The trial court judge held that the preponderance of the evidence rule applied, and found the actual value of 300 shares of stock to be $600,000 as of November 10, 1978. That judge applied a 25% minority interest discount, deducted the purchase price, added the $4,000 bonus due, and rendered judgment for Blasingame for $429,000. The court of appeals affirmed those findings.
At the Supreme Court, American Materials claimed that the stock in their closely held corporations was governed by the Statute of Frauds, which excludes the sale of securities from the partial performance of a contract. Supreme Court Chief Justice Fones disagreed, holding that the facts in the case brought it squarely within the Doctrine of Partial Performance of a verbal employment contract. The corporation’s stock history and the restriction upon its sale in the by-laws rendered it impossible for the corporation to prove that its stock was dealt in by securities exchanges or was recognized as an investment medium.
American Materials also asserted that it was error to award Blasingame a 25% interest, and that in October 1975, when Blasingame was terminated, the corporation issued an outstanding 1,500 shares of stock; hence, Blasingame’s 300 shares would be only 16.6% of the corporate stock. Chief Justice Fones disagreed with this theory as well, and said that although there was substantial evidence to support the claim, there was also evidence that Blasingame was promised and was entitled to a 25% interest in the corporation.
American Materials also claimed that the method of valuation used by Blasingame’s expert witnesses was erroneous and resulted in an excessive valuation of his stock interest. The corporation supported this contention by the fact that all three of plaintiff’s experts used only one method of valuation—the earnings value method or the capitalization of earnings method—and that only the earnings for 1978, American Materials’ best earnings year, were considered. With these factors, each of Blasingame’s experts valued his stock interest as being within the narrow range from $657,572 to $672,500. Chief Justice Fones stated that the majority of jurisdictions require at least the use of three years as an appropriate minimum period to validate the earnings value method. The traditional period, the court said, was five years, and for some corporations the appropriate period could be up to 10 years. The supreme court held that any valuation of earnings that does not take into consideration a minimum of three years of corporate earnings experience should be rejected, unless the expert opinion clearly and convincingly establishes the validity of less than a three-year period.
Tennessee statutes do not spell out any methods for determining the “fair value” of the dissenting stockholder’s stock, nor have Tennessee courts addressed that issue. In light of that, Chief Justice Fones looked to other states and found that many had identical statutes which governed dissenting stockholders’ rights in a merger or other circumstances to which the stockholder may object, that have established valuation methods to be used in determining fair value. The supreme court quoted a 1971 North Dakota supreme court decision, which detailed three primary methods used by courts to determine the fair value of shares of dissenting shareholders. These three methods are the market value method, the asset value method, and the investment or earnings value method.
The market value method establishes the value of the share on the basis of the price for which a share is selling or could be sold to a willing buyer, and is most reliable when there is an established market for the stock.
The asset value method looks to the net assets of the corporation valued as a ‘going concern’, each share has a pro rata value of the net assets. The net assets value depends on the real worth of the assets as determined by physical appraisals, accurate inventories, and realistic allowances for depreciation and obsolescence.
The investment value method relates to the earning capacity of the corporation and involves an attempt to predict its future income, based primarily on its previous earnings record. Dividends paid by the corporation are considered in its investment value.
According to the North Dakota case, all the elements involved in these methods are considered in determining the value of the dissenter’s stock. That court adopted the Delaware rule which required that all three methods be used in determining the fair value of a dissenter’s shares. A weight is assigned to each method by considering the type of business, the objectives of the corporation, and other relevant factors. When there is an established market for the stock, the market price is given greater weight; if there is no reliable market and none can be reconstructed, market price is not considered at all. A higher value is usually assigned only in cases where the primary purpose of the corporation is to hold assets (such as real estate), for appreciation in value; assets are weighed more heavily when they are held for appreciation purposes rather than for commercial retail or wholesale purposes designed to generate earnings. In a commercial business, earnings are generally given great weight because the primary purpose of the business is to generate earnings and not to hold assets that will appreciate in value.
The Supreme Court of Tennessee noted that expert witnesses might find other relevant factors on the question of the weight to be given to each of the three methods, but the court must make the final determination as to the appropriate weight and the ultimate value of the stock interest. To determine the value of Blasingame’s stock, the Supreme Court adopted the Delaware rule and found that both lower courts incorrectly determined that Blasingame’s stock interest should be valued as of November 10, 1978.
The date on which American Materials terminated Blasingame’s employment—October 13, 1975—was the day he knew his oral employment contract had been breached. On that same day, his cause of action for fraud came about. The court recited that reason, logic, and the general principles of the law of damages required that the property that is the subject of the fraud be valued as of the date when the fraudulent representations were made. Chief Justice Fones reasoned that on the day Blasingame’s services were terminated by the corporation, his interests and those of the majority stockholders of the corporation became adverse and antagonistic. As a result, his position paralleled that of a minority stockholder entitled to the benefits of Tenn. Code. § 48-909(5), which states that “The fair value of shares shall be determined as of the day prior to the date on which the vote was taken approving the proposed corporate action, excluding any appreciation or depreciation of shares in anticipation of such corporate action.”
With that, the Supreme Court affirmed the Court of Appeals holding American Materials liable to Blasingame for a stock interest equivalent to one-fourth of the corporation’s value, as well as the award of $4,000 as the correct sum due plaintiff for unpaid bonuses. The Supreme Court set aside the award of $425,000, and remanded the case to the trial court to determine the value of a stock interest equal to one-fourth of the value of the corporation as of October 13, 1975 that is consistent with the principles discussed above.
See original opinion for exact language. Legal citations omitted.
To learn more about Tennessee business valuation law, see Business Valuation in Tennessee Divorce Law. To learn more about the division and valuation of professional practices in divorce, see When Professionals Divorce in Tennessee: Valuing Professional Practices.
Miles Mason, Sr. JD, CPA handles complex divorce matters including business valuations and forensic accounting issues. View his professional biography listing books and articles published on business valuation and forensic accounting, seminars presented to lawyers, judges, business valuation experts, and forensic accountants. Miles Mason, Sr. authored The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association. The Miles Mason Family Law Group, PLC’s offices are located in Memphis, Tennessee and serves West Tennessee and Nashville.
