Vol. 11, No. 5, Pg. 14. Appeals Court Weighs in on Stock Valuation.

• Author: By George W. DuRant and Frederick A. Crawford

South Carolina Lawyer

2000.

Vol. 11, No. 5, Pg. 14.

Appeals Court Weighs in on Stock Valuation

14Appeals Court Weighs in on Stock ValuationBy George W. DuRant and Frederick A. CrawfordShareholders dissenting from certain corporate actions such as a merger or sale of all corporate assets are entitled to receive fair value for their shares under South Carolina's Dissenters' Rights statutes (S.C. Code § 33-13-101 et. seq.)

The statutes prescribe detailed price negotiation procedures that the corporation and a dissenting shareholder must satisfy prior to asking for a judicial determination of value. If those negotiations are unsuccessful, the corporation must petition a circuit court to determine fair value (S.C. Code § 3313-300(a)).

Since the sole purpose of dissenters' rights litigation is to determine value, both the corporation and the dissenting shareholder(s) should proffer expert business valuation testimony as to the dissenting stock's fair value. Lawyers have a duty to ensure such testimony is reliable and is based on valuation techniques that are accepted generally in the financial community and in South Carolina courts.

Recently, the South Carolina Court of Appeals rejected, in part, the valuation testimony offered on behalf of a corporation and its dissenting shareholder and performed its own valuation. In Belk of Spartanburg, S.C., Inc. v. Thompson Op. No. 3040, (S.C. Ct. App. filed Aug. 30, 1999) (Shearhouse Adv. Sh. No. 29 at 1), the court reaffirmed the valuation methodology to be used in dissenters' rights cases in South Carolina.

In Belk, Belk Department Store of Spartanburg, S.C., Inc. (BDS) announced its intention of merging, and Ms. Thompson, a minority shareholder, dissented. Pursuant to statutory requirements, BDS tendered payment to Ms. Thompson for her shares based on its estimate of fair value. Ms. Thompson disputed the value assigned by BDS and demanded additional payment. Subsequently, judicial determination of fair value was sought.

On appeal, Ms. Thompson argued that "the evidence demonstrated the fair market value of BDS stock 'far exceeded' the court's value . . . " That reasoning implies an expectation that fair marketvalue is equal to or greater than

16fair value, as defined in S.C. Code § 33-13-101(3). The Belk decision implies that proposition is simply not correct and demonstrates a significant difference between those two standards of value.

The common definition of fair market value goes something like this: "the price at which property would change hands between a hypothetical willing seller and a hypothetical willing buyer, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts."

Although there is a statutory definition (S.C. Code § 33-13101(3)), there is no common definition of fair value. As a caution to those who confidently seek judicial determination of fair value thinking the Belk case or any other case offers universal applicability in determining value, beware, the definition of fair value is to some extent "whatever the court thinks is fair, is fair." Citing Santee Oil Co. v....