In Athlon Sports Communications, Inc. v. Duggan, 549 S.W.3d 107 (Tenn. June 8, 2018), the Tennessee Supreme Court adopted the flexible valuation approach for determining the fair value of a dissenting shareholder’s stock set forth in the Delaware Supreme Court’s decision in Weinberger v. UOP, Inc. and overruled its prior decision Blasingame v. American Materials, Inc., 654 S.W.2d 659 (Tenn. 1983), to the extent that Blasingame mandated the use of the Delaware Block valuation method.

Under the common law, as described by the Tennessee Supreme Court, fundamental corporate changes such as a merger could be implemented only upon a unanimous vote of the corporation’s shareholders.  As corporations became more democratic, that is, subject to majority rule, minority shareholders were provided an appraisal remedy in return for giving up their veto rights over such fundamental changes.  Athlon Sports, 549 S.W.3d at 117.  

The appraisal remedy protects dissenting minority shareholders by allowing them to force the corporation to purchase their shares at a judicially determined price.  The remedy is embodied in the “dissenters’ rights” statute of every state.  Under Tennessee’s statute, “[a] shareholder is entitled to dissent from, and obtain payment of the fair value of the shareholder’s shares in the event of . . . a plan of merger.”  Id. at 118.  “‘Fair value’ with respect to a dissenter’s shares means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action.”  Id. at 119.  

The court noted that the term “fair value” is not the same as “fair market value.”  Id.  “Fair market value is typically defined as the price at which property would change hands between a willing buyer and a willing seller when neither party is under an obligation to act.”  Id.  But that is not the position of a dissenting shareholder, who is an unwilling seller who often has no ready market, such as in the closely held business context.  Moreover, “fair value” also encompasses “the statutory purpose that shareholders be fairly compensated, which may or may not equate with the market’s judgment about the stock’s value.”  Id. (internal quotation marks omitted).   

In 1950, the Delaware Supreme Court decided Tri-Continental Corp. v. Battye, 74 A.2d 71 (Del. 1950), which espoused the so-called “Delaware Block” method of valuation of dissenters’ shares.  Athlon Sports, 549 S.W.3d at 121.  In short, the Delaware Block method required an appraiser to determine the corporation’s value under three valuation methods: (a) market value, (b) asset value, and (c) earnings value.  The three values were then weighted based on “the type of business, the objectives of the corporation, and other relevant factors.” Id. (citing Blasingame, 654 S.W.2d at 666).

Then, in 1983, the Delaware Supreme Court decided Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), holding that Delaware Block would “no longer exclusively control” valuation of dissenters’ shares.  Instead, the court adopted a much more flexible approach that permitted “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court.”  Athlon Sports, 549 S.W.3d at 122 (quoting Weinberger).  According to the Tennessee Supreme Court, since Weinberger, to determine fair value, courts in most states take into consideration any evidence that may be relevant, including lay and expert testimony.  Id. at 123.

In Blasingame, the Tennessee Supreme Court formally adopted the Delaware Block method to determine fair value.  According to the Tennessee Supreme Court, some Tennessee courts perceived Blasingame as holding that Delaware Block was the only permissible valuation method in Tennessee.  However, since Blasingame, the Court felt that it had become clear that Delaware Block is not the exclusive valuation method in dissenters’ rights cases and that flexible approach in Weinberger decision is superior.

Accordingly, the Court overruled Blasingame to the extent that it implied that Tennessee trial courts were permitted to use only the Delaware Block method.  Instead, the Court adopted “the more open Weinberger approach, which allows ‘proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court.’” Athlon Sports, 549 S.W.3d at 126 (quoting Weinberger).  It held that “[t]he Delaware Block method of valuation remains available where appropriate, but trial courts may now choose to use another valuation method to determine the fair value of a dissenting shareholder’s shares of stock.”  Id.

At Novack and Macey, we have extensive experience advising shareholders involved in closely held company disputes, as well as advising companies on how to avoid disputes in the first place. For more information about our services, please contact John Haarlow at 312.419.6900 or jhaarlow@novackmacey.com.