Delaware Block Method Used to Determine Corp Share Value

Tennessee business valuation law case summary regarding valuation method from the Tennessee Court of Appeals.  This case sets standard case law and legal theory many Tennessee divorce and family law cases cite.

Elk Yarn Mills v. 514 Shares of Common Stock of Elk Yarn Mills, Inc. – Tennessee business valuation law

Relating to a corporate merger between Elk Yarn Mills and Elk Merger Corporation, four groups of dissenting shareholders appealed a trial court judge’s corporate share valuation on the basis that the factors used in the Delaware Block method of evaluation were not correct.

All parties to the lawsuit agreed that the Delaware Block method should be used to determine the value of the corporate shares.  This method of calculation utilizes each of the primary methods for determining value, such as the market, the assets, and the earnings. Once the value of these factors is determined, the values are then multiplied by a weighted factor expressed as a percentage of the whole.  Consequently, when added together, the products of the calculations will equal one hundred percent and represent the total value of each share.  The type of business, the objectives of the corporation and other relevant factors need to be taken into consideration when determining the weight given to each of the particular values.

The first appraiser hired by the shareholders was employed by the corporation around the time of the merger and requested to conduct an appraisal on the company’s plant and real property. The shareholder expert based his appraisal on all three recognized valuation methods; income approach, cost approach, and market approach. The appraiser valued the corporate plant at $2,500,000.00, and the additional 212 acres of land that was not being used by the company at $212,000.00.

Later, the dissenting shareholders retained another expert to perform an appraisal on the Tennessee plant, which relied solely on the sales comparison approach, comparing thirteen real estate sales from 1974 through 1985. However, none of the comparable sales figures were from plants that were operating, and he deducted from his company valuation the anticipated costs involved in asset liquidation, in spite of the fact that this corporation was a going concern and the plant was still operating.

The trial judge accepted the calculations offered by the dissenters’ expert and slightly modified those values to arrive at the net asset value of the company stock.  He first concluded that the market value of each share was $100.00, the asset value was $539.10 per share, and the value based earnings was $306.38 per share.  He then gave the market value a weight of five percent, the asset value thirty-five percent, and the earnings value sixty percent.

The dissenting shareholders then filed an appeal challenging the trial judge’s decision.  The shareholders disagreed with the judge’s determination of a thirty-five percent asset value per share, which they believed should be fifteen percent. The shareholders also disputed the trial judge’s assignment of an earnings value of $306.38 to each share of the company stock, which they believed should be $142.50 per share.

The Appellate Court affirmed the trial judge’s decision, since there was justification for the thirty-five percent weight given to the asset value.  The company was holding assets over and above what was necessary for its operation, had consistently paid small dividends while re-investing a large share of its net profits back into the business, and the company had 212 acres of undeveloped land surrounding its plant in Fayetteville.

With regards to the earnings value, the parties agree that over that five-year period the company averaged earning $28.50 per share.  The dispute related to the appropriate price/earnings ratio to apply to the company’s average earnings per share over the previous five years. The Appellate Court agreed with the trial judge’s use of a price/earnings ratio of 10.75, based on the fact that it was the ratio used in the proxy statement sent by the company to shareholders in attempting to explain and justify the cash merger offer, and this figure was comparable to fourteen companies in Moody’s Stock Guide.  Since the selection of a price/earnings ratio is always difficult and imprecise, the Appellate Court held that the trial judge’s assessment need only be within the realm of reason.

Elk Yarn Mills v. 514 Shares of Common Stock of Elk Yarn Mills, Inc., 742 S.W.2d 638 (Tenn. Ct. App. 1987).

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 and 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. Contact Us today at (901) 683-1850.