Article courtesy of Jeff Dutson of King & Spalding
In first impression appraisal judgment case, with an underlying conflicted transaction, the Supreme Court of North Carolina gives wide latitude to trial courts determining ‘Fair Value’ under MBCA based N.C.G.S §55-13-22.
Reynolds American Inc. v. Third Motion Equities Master Fund Ltd., 866 S.E. 2d 869 (Sup. Ct. NC 2021)
British American Tobacco (“BAT”) owned 42% of Reynolds American Inc. (“RAI”) and controlled several seats on the board of directors. In 2017, BAT offered to purchase the remaining shares of RAI in a merger. The merger agreement was negotiated by BAT and a Transaction Committee comprised of non-BAT affiliated RAI board members. After BAT acquired RAI a group of dissenting shareholders refused to tender their shares and sent RAI a signed appraisal. RAI paid the dissenters the amount estimated to be fair value of their shares. However, the dissenting shareholders refused to accept the offer and RAI filed a complaint for judicial appraisal under N.C.G.S §55-13-22. At trial, the North Carolina Business Court determined that the fair value of the dissenting shareholders’ shares was less than or equal to the deal price and that no additional payment was required.
The Supreme Court rejected the shareholders’ contention that the Business Court failed to determine the fair value of their shares using “customary and current valuation concepts and techniques” as required under N.C.G.S § 55-13-01(5). The court held that the trial court’s decision to credit the deal price was informed by valuation analysis that confirmed the deal price was indicative of fair value. Even though a formal market check was not conducted, the court pointed to the committee of independent directors who oversaw the merger as indicia of the transaction process’s reliability. Universally accepted valuation techniques like discounted cash flow analysis (“DCF”) were also introduced by the dissenting shareholders at trial. The court rejected the contention that the trial court erred by not relying on the DCF because the results of DCF analysis are extremely sensitive to minor variations and it was not necessary to establish fair value under the state’s appraisal statute.
Reynolds was the first public-company appraisal case tried in North Carolina and highlighted the discretion given to trial courts in determining fair value in an appraisal proceeding by affirming the judgment despite non-reliance on certain customary valuation concepts.