In the early 1990s, a veterinarian formed a company to develop an animal food supplement with two partners, including the defendant. When the company discovered the defendant was creating a competitive supplement based on the same formula, it sued and won an $800,000 verdict. Six months later, the company merged with a California firm and the defendant invoked his statutory right to dissent and demanded purchase of his shares. Not surprisingly, the parties were unable to agree on the fair value of his 33% interest and found themselves back in court.
The parties’ experts proposed widely divergent fair value appraisals. The company’s expert was an experienced business appraiser who valued the enterprise at approximately $3.7 million. The defendant’s expert, an investment banker with experience in the natural foods industry, valued the company at more than twice that amount—or $7.6 million. The federal district court ultimately adopted the lower value by the company’s expert, finding it more reliable for several reasons, including her
“significant appraisal experience; her application of the fair value standard as reflected in Colorado law; her reliance on [the company’s] financial records; and the thoroughness with which she explained and duplicated her methodology.”
By contrast, the court noted several “gaps” in the methodology used by the defendant’s expert, questioned his choice of comparable companies and products, and discredited his anticipated growth rate calculation.
The court accepted the defendant’s assertion that the company’s $800,000 judgment against him was too contingent on collectability to be included as an asset. However, the court declined to subordinate the company’s debt to the defendant’s share, and ultimately reached a going concern value of roughly $2.3 million—or just $800,000 for the defendant’s 33% interest (ironically, just about the same amount as the defendant owed the company in the prior lawsuit).
After an unsuccessful request for reconsideration, the parties appealed to the U.S. Court of Appeals for the Tenth Circuit. On “careful” review of the record and the applicable state law, the 10th Circuit summarily dismissed all claims. The district court correctly determined the valuation date and the more credible valuation. It also correctly decided that the $800,000 judgment in favor of the company was too contingent to include in the fair value appraisal, but that all corporate debt should be included before an award of the defendant’s proportionate share.