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Second District Reverses Trial Court’s Judicial Determination of Fair Market Value in Shareholder Dispute

 

As Chicago shareholder dispute attorneys, we noted with interest a recent decision on calculating fair market value of stock owned by a dissenting shareholder. Brynwood Company v. Schweisberger, No. 02-06-1178, (Ill. 2nd Dist. July 23, 2009) pitted a corporation against its co-founder and majority shareholder. The Brynwood Company, which is now dissolved, was an Illinois C corporation organized in 1979. It existed only for the purpose of owning and administering an office building in Rockford, Ill. Stuart Schweisberger was a founder of Brynwood, the president, a member of the board of directors until 2000 and a tenant with an accounting firm in the building. He was also the accountant for Brynwood until 1994.

Schweisberger retired in 1996 with 26% of the company’s stock. In 1999 and 2000, the Brynwood board began to consider ways to change the corporation, including selling the building and dissolving the corporation. In 2001, Schweisberger negotiated with Brynwood to sell his shares, but negotiations ultimately faltered. In 2002, Brynwood notified Schweisberger that it had an offer to sell the building to a third party, but wanted to convert to an S corporation to avoid income tax liability instead and hold on to it for 10 more years. Schweisberger did not consent to the conversion, in part because it would require changes to his IRA. When Brynwood failed to get his consent, it held a meeting at which shareholders agreed to sell the building and dissolve the corporation.

The building was sold for $1.4 million, with $959,282 in capital gains. The mortgage of $353,080 was paid from the proceeds, and another $446,593 was paid in taxes, professional fees and other costs. A bit more than a week after the sale, Schweisberger filed a notice objecting to the sale and demanding payment of the “fair value” of his shares under the Illinois Business Corporation Act of 1983. When Brynwood dissolved, it estimated fair value of the shares at $30.08; Schweisberger estimated fair value at $66.31 and also demanded 6.75% interest, which was the former mortgage’s interest rate. In October, Schweisberger surrendered his shares in exchange for the $30.08 price plus a much lower interest rate based on the interest earned on the certificate of deposit holding the proceeds of the sale. However, in December of 2002, Brynwood filed for a judicial determination of the fair value of Schweisberger’s stock and interest due to him.

At trial, the basis for the difference between Schweisberger’s and Brynwood’s valuations became clear. Schweisberger testified as his own expert witness, saying he came to the $66.31 valuation by excluding the costs of capital gains taxes, fees and costs. Because he objected to the sale, he said, he thought his shares should be calculated without those costs. Brynwood’s expert, accountant Gary Randle, testified that the fair valuation should be calculated according to what each individual shareholder eventually received from the liquidation, which he put at $36.15 per share. He said if Schweisberger had actually received his requested $66.31 per share, other shareholders would have received about $25 a share. Another expert witness for Schweisberger, accountant Mark Patterson, testified that he believed the value could also be calculated as a “going concern,” cutting out the taxes, fees and costs from the sale.

Before and during trial, Brynwood objected to Patterson’s presence and testimony. It said Patterson was unqualified to give testimony because he had admittedly never valued this type of company before. It also contended that his testimony was nothing more than a definition of the legal term “fair value.” The court twice dismissed these objections.

The trial court found that Schweisberger timely exercised his right to dissent and that the board knew the sale would trigger taxes, fees and costs. Because of that, and because the only reason for the sale was the majority’s preference, it found that Schweisberger’s shares should be calculated without taking those costs into account. It also found that the interest rate should be the 6.75% interest Schweisberger had requested, giving rise to a share value of $60.68. This gave Schweisberger a judgment of $181,130.45. Brynwood appealed.

The Second District started by addressing Brynwood’s concerns at trial: that Patterson should not have been allowed to testify as an expert because he had never valued this type of company, and that admitting his testimony was an abuse of discretion because he was doing nothing more than interpreting the words “fair value.” The appeals court disagreed. Valuation is part of the business of accounting, it said, and experience in valuing a particular type of business is unnecessary. Furthermore, a review of Patterson’s testimony shows that it included reasons for his opinions, not just the definitions of terms. Thus, the trial court did not abuse its discretion in admitting the testimony, the Second said.

Brynwood had more luck with its argument that the trial court’s valuation decision was against the manifest weight of the evidence. The company argued that by subtracting taxes, costs and fees, the court artificially inflated the value of Schweisberger’s shares at the expense of the majority of shareholders. The court agreed, saying that excluding those costs did not meet the Business Corporation Act’s goal of fair and equal treatment for all shareholders. Capital gains taxes and other costs are intrinsically tied to the value of a closely held real estate company like Brynwood, the court wrote, and thus to its stock’s value. This made the trial court’s decision against the manifest weight of the evidence. Thus, the appeals court overturned that decision and sent it back to trial court for a new determination of value, taking taxes, costs and fees into account.


The Illinois business litigation attorneys at DiTommaso-Lubin have more than 25 years of experience representing businesses and their partners, shareholders and leaders in high-stakes lawsuits. We have represented businesses of every size, from closely held private businesses to large corporations employing many people. When representing corporations, we have a special focus on shareholder disputes like this one, including Illinois shareholder freeze-out lawsuits pitting the rights of a minority of shareholders against the majority. Based in downtown Chicago and Oakbrook Terrace, near Aurora, Naperville and Wheaton, our trial lawyers represent clients all over the state of Illinois and in Indiana and Wisconsin.

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