APPEAL from the Circuit Court of Winnebago County; the Hon.
JOHN S. GHENT, JR., Judge, presiding.
MR. JUSTICE SEIDENFELD DELIVERED THE OPINION OF THE COURT:
The defendant D.J. Stewart & Company, an Illinois corporation (hereinafter STEWART), was merged into the defendant D.J. Stewart & Company, a Wisconsin corporation (hereinafter STEWART, WISCONSIN), the wholly owned subsidiary of the Illinois corporation. The plaintiffs, as minority stockholders of the Illinois corporation, sued to determine the fair value of their shares pursuant to section 70 of the Illinois Business Corporation Act (Ill. Rev. Stat. 1973, ch. 32, par. 157.70). *fn1 The judge, after a bench trial, entered judgment valuing the plaintiffs' shares at $660 per share and awarded interest from the date of the merger. The defendant corporations appeal.
They contend that the court committed prejudicial error in rulings on evidence and that the judgment is contrary to the manifest weight of the proper evidence.
The defendant STEWART was first established in 1886, incorporated in 1886 or 1890, and continually operated as a two-family retail department store business until 80% of its outstanding shares were sold on February 25, 1972. On that date the shares were purchased by DieMax Corporation, a wholly owned subsidiary of Rockford aacromatics Corporation, at a price of $600 per share. Approximately 21 months later, on November 26, 1973, STEWART was merged into the Wisconsin Corporation. At the time of the merger plaintiffs owned 10% of the stock of STEWART. They objected to the merger and filed a complaint seeking the "fair value" of their shares as of the day prior to the date of the merger pursuant to section 70 of the Business Corporation Act. Defendants, in their answer to the complaint, offered first $183.05 per share and just prior to trial reduced the offer to $105 per share.
Arthur Triebel, a certified public accountant, testified for the plaintiffs. In his opinion the fair value of the shares on the appropriate date was $750 per share. He based his opinion on sales volume, net operating profit, net income before taxes, and book value. He averaged these factors over a five-year period. Based on the increases in these categories for the approximate 21-month period after acquisition and prior to the merger he made a preliminary calculation which, in summary, was illustrated by the following table (Plaintiff's Exhibit No. 4):
" (1) (2) (3) (4) (5) Price (3 X 4) Jan. 31, Per (2 ÷ 1) Nov. 30, Fair Five year average: 1972 Share Ratio 1973 Value
(A) Sales $4,065,138 $600 .000148 $4,214,705 $ 624 (B) Net Operating Profit 84,021 600 .00714 110,705 790 (C) Net Income Before Taxes 13,686 600 .0438 37,840 1,657 (D) Book Value 766 600 .7835 784 614
Method #1 .25A .25B .25C .25D = $920 Method #2 .20A .20B .10C .50D = 755 Method #3 .33A .33B .33D = 675 Method #4 .25A .25B .50D = 660"
The witness began with the arm's length transaction on January 31, 1972, which established the value of $600 per share. He then adjusted this figure by an examination of sales, net operating profits and net profit before taxes by constructing a five-year fiscal period ending on November 30 of 1973, 1972, 1971, 1970 and 1969, respectively. He then averaged the increase in these figures. The book value figure was in accordance with the value carried on the books of the corporation and did not include good will. It appeared from the books of the company that on the date of the acquisition in 1972 the book value was $800 per share which had increased to $830 per share on the date of the merger in 1973. He testified that the $750 figure was "somewhat a medium figure between all four methods." On cross-examination he stated that he did not believe that the value should be reduced because only a 10% minority interest was involved in the merger. He said he gave no weight to dividends because in his experience closely held corporations seldom paid dividends and that in these circumstances they had little practical effect on value.
John D. Emory, an economist associated with a Milwaukee investment firm with experience in appraising closely held corporations, testified for the defendants. He concluded that the fair value of the plaintiffs' stock on the day before the merger was $105 per share. He based his opinion on his consideration of earnings, return on investments, book value, financial conditions, and dividend paying capacity. Marketability and the acquisition sale were also considered. The various factors were compared to similar factors in retailing companies listed on stock exchanges. He stated that he was interested in finding what the "fair market value is for minority stock * * * through the eyes of a hypothetical investor who could be willing to buy the stock in light of other alternatives and available investment opportunities." He did not testify as to the specific weight he gave to the various factors except in relation to the compared companies.
Joseph Wagner, a tax supervisor for the DieMax Company, testified for the defendants. He possessed a law degree, had taken courses in accounting and had experience involving the appraisal of closely held corporations. He concluded that the fair value of the stock in question on the appropriate date was $195 per share. He considered adjusted earnings over a five-year period and also compared them with earnings of department stores listed on stock exchanges which he considered comparable and with other comparable companies where information was publicly available. He compared price-earning ratios of the various companies. He also considered the same factors which Emory had relied upon in making his valuation. Wagner said he gave a weight of 10% to book value, and 10% to the prior acquisition figure of $600.
The court found the fair value of the minority shares to be $660 per share on the applicable date. Judgment was entered against defendants in favor of Sturtevant Stewart, owner of 145 shares for $95,700; and in favor of S. Penfield Stewart, owner of 30 shares for $19,800, plus interest.
Defendants initially contend that the court erred in admitting the price paid for STEWART'S stock at the earlier acquisition date, and in limiting defense testimony tending to show economic and market factors affecting retailing stocks in general during the interim period subsequent to the acquisition but prior to the merger. They also claim that ...