Appeal from the Circuit Court of St. Clair County; the Hon.
Joseph F. Cunningham, Judge, presiding.
JUSTICE KARNS DELIVERED THE OPINION OF THE COURT:
Both parties appeal from the judgment of the circuit court of St. Clair County which ordered plaintiff Leo Callier (Leo) to transfer certain shares of stock in a close corporation as damages suffered by defendants Scott Callier (Scott) and All Steel Pipe and Tube, Inc. (All Steel), an Illinois corporation. This judgment was entered on remand from this court, which reversed a prior judgment ordering liquidation of the assets and business of All Steel. On appeal, Leo contends: (1) that, in the absence of a finding that he violated some fiduciary duty to defendants, the trial court erred in ordering him to pay damages to defendants, (2) that his actions were not the proximate cause of any damages defendants may have suffered, and (3) that, in any event, there was no proof that Scott or All Steel suffered any damages. Scott cross-appeals contending: (1) that the trial court failed to interpret properly and apply the prior judgment of this court, (2) that the damage award was insufficient to adequately redress the wrong done to defendants, (3) that an improper test was utilized to determine the going-concern value of the business, and (4) that defendants should have been awarded prejudgment interest.
In the prior appeal (Callier v. Callier (1978), 61 Ill. App.3d 1011, 378 N.E.2d 405), this court found that Leo failed to prove that there was a deadlock in management or a threat of irreparable injury sufficient to require the liquidation of the assets and business of All Steel, pursuant to section 86 (a)(1) of the Business Corporation Act of 1933, as amended (Ill. Rev. Stat. 1975, ch. 32, par. 157.86(a)(1)). The cause was remanded with instructions allowing the trial court to receive further evidence in order "to fashion a fair and equitable remedy for the redress of the wrong done to appellants." (Callier v. Callier (1978), 61 Ill. App.3d 1011, 1016, 378 N.E.2d 405, 409.) Further, we indicated that in determining damages the trial court should consider the difference between the going-concern value of the business and the assets in the hands of the receiver. Callier v. Callier (1978), 61 Ill. App.3d 1011, 1015, 378 N.E.2d 405, 409.
Scott and Leo are each 50% shareholders in All Steel, which was incorporated in 1969. As a broker of steel pipes and tubes, All Steel was not a capital intensive business and was not required to conduct a substantial warehousing operation. It owned no real estate. All Steel's board of directors consisted of Leo, who is also the president, and Felix Callier. It is undisputed that Felix, now deceased, was Scott's "nominee," that he never took an active role in the management of the company and that his primary function was to act as Scott's representative. The daily management of All Steel was always handled by Leo. Although Scott was the general manager of All Steel, he lived in Florida and only occasionally traveled to the company headquarters in St. Louis. Aside from their business relationship, all three men are related: Leo is Scott's nephew, and Felix is Scott's father and Leo's grandfather.
Although All Steel lost money during 1969 and 1970, by 1973 the company was making a profit. In 1974, the industry as a whole and All Steel in particular had an extremely profitable year. Profits for 1974 were astronomical. Unfortunately, during this same year the relationship between Scott and Leo became increasingly stressful. By January 1975, Leo and Scott had begun redemption discussions. In principle, they agreed that Scott's shares would be redeemed and that Leo would continue to run All Steel.
Between January and April 1975, frequent redemption discussions were held by Leo and Scott personally and by their attorneys. These discussions proved fruitless, with Scott demanding one million after-tax dollars for his 50% share of All Steel, but he was only willing to pay Leo one sixth that amount for his 50% share. By early April, the discussions began to focus on liquidation. On April 10 and on April 23, 1975, Scott's attorney wrote letters to Leo's attorney stating that redemption discussions had failed, that it was unlikely that they could profitably sell All Steel, that liquidation was the only solution, that all employees unnecessary to "wind down" should be terminated and that Leo should begin to "wind down" the business. Scott personally expressed this position during a meeting on April 20, 1975. On April 30, 1975, Scott changed his mind about liquidation and stated that Leo should continue to run the business. Although Leo's attorney suggested that Scott manage All Steel, Scott refused.
At least twice during April 1975, Scott stated his intention to start a company in competition with All Steel, and in fact, Scott did start two such businesses. Both businesses failed in less than one year. Leo also started a separate and competing business. On May 5, 1975, Callier Pipe and Tube, Inc. (Callier), was incorporated as a Delaware corporation. Leo remained with All Steel during the May "wind down," and began working at Callier on June 2, 1975. Callier is currently in operation. During the "wind down," Leo's attorney kept Scott's attorney fully advised as to events at All Steel. In testimony and at oral arguments, Scott conceded that there was nothing wrong with Leo starting Callier, except that he did not officially resign as an officer and director of All Steel prior to starting Callier.
The second trial focused on two primary issues, the actions of each party during the spring of 1975 and the going-concern value of All Steel, with both Leo and Scott presenting expert testimony as to the going-concern value of All Steel. Both experts considered numerous factors in their determinations including the following: the size of the company, the age of the company, the relative unmarketability of closely held stock, company management and other factors affecting the industry as a whole. Both experts noted that 1974 was an unusually profitable year and unlike any previous year in the history of All Steel and the other companies in the industry.
Dr. James P. Jennings, a Ph.D. in accounting and the chairman of the accounting department at St. Louis University, testified as an expert witness for Scott and All Steel. Although Jennings had previously valued approximately 25 businesses and testified in at least 12 trials, his prior experience was limited to the valuation of businesses involved in disputed dissolution of marriage cases. To arrive at the going-concern value of All Steel as of May 1, 1975, Jennings utilized a capitalization of earnings technique which consisted primarily of determining a figure representative of the company's future annual earning capacity and multiplying that figure by a price/earnings ratio that would reflect the risks inherent in the investment and the nature of the stock market at that point in time. Jennings stressed the importance of selecting a truly representative year when determining the earnings and value of a company and the importance of utilizing profit and loss statements for at least five years to arrive at a base earning figure. Jennings further testified that 1974 was a "big boom year" and not representative for either All Steel or the industry. Despite this testimony, Jennings selected 1974 as his base year. Information from previous years was not used in his calculations. Utilizing 1974 after-tax earnings of $1,825,500, Jennings projected that the 1975 after-tax earnings would have been $1,420,000. Jennings testified that the drop in 1975 earnings was attributable to increased costs in early 1975. Next, Jennings determined the price/earnings ratio, using the Standard and Poor's data for the 400 industrials for the first week of May 1975. This figure was 10.0. Jennings testified that none of the Standard and Poor's 400 industrials were involved in the steel servicing centers business, that information from companies in the same type of business would have been beneficial to his evaluation, that the four companies analyzed by Leo's expert witness were in the same type of business as All Steel, that the companies analyzed by Leo's expert witness had a price/earnings ratio of between 1 and 3 for 1974 and that to look merely at a price/earning ratio of one year did not provide sufficient information to make an intelligent decision. Nevertheless, Jennings determined that the appropriate price/earnings ratio was 8.5, a 15% reduction from the one week figure of 10.0 to compensate for the inherent difficulties in marketing a privately held corporation. Multiplying the $1,420,000 earnings figure by the 8.5 price/earnings ratio, Jennings calculated the value of All Steel was $12,070,000 as of May 1, 1975, and that Scott's 50% interest in All Steel was worth $6,035,000. Finally, Jennings testified that his evaluation of All Steel's going-concern value was based on the assumption that Leo would continue to manage the company which would continue in existence and that Scott would no longer be associated with the company.
Mr. John Harwood, a vice-president and corporate valuations officer for A.G. Edwards & Sons, an investment banking and securities brokerage firm, testified as an expert witness for Leo. Prior to joining A.G. Edwards, Harwood had been involved in the steel service center business for more than 20 years. Harwood used a capitalization of earnings technique similar to Jennings' technique, but with several important differences. Harwood testified that he averaged the per share earnings from 1970 to 1974 to calculate a base earnings per share of $338.39. He testified that the 1974 earnings were included in his calculations, but were not relied on as the sole source of information. Harwood next examined information of other steel service center businesses and selected the four public companies that he thought were most comparable to All Steel. Harwood testified that although these companies were significantly larger than All Steel, they were substantially similar in other ways, including the fact that two of them were located in the St. Louis area. Relying on this same five-year period, Harwood determined that the appropriate price/earnings ratio was 10.27, notwithstanding that it was only 1 to 3 for the same industries during 1974. Multiplying the five-year average earnings per share of $338.39 by the price/earnings multiplier of 10.27 resulted in a price per share of $3,474.24 as of April 30, 1975. Utilizing the same process with data for March 30, 1975, Harwood testified that All Steel was worth more on April 30, 1975, than it was on March 30, 1975. Harwood further testified that it was necessary to discount this price per share by a number of factors to compensate for the differences between All Steel and the comparison companies. These discount factors included the following: (1) 15% because All Steel was significantly smaller, (2) 5% because of All Steel's narrow product line, (3) 5% because of All Steel's "thin" management, (4) 5% because All Steel's debt to equity ratio was two to three times greater, (5) 5% because All Steel's 1975 first quarter earnings were not as good as the other companies, and (6) 10% because All Steel had a short operating history. The foregoing adjustments amount to a 45% discount, resulting in a per share price of $1,910.83, or a total value of $2,101,913 for the total 1,100 shares. Harwood testified that an additional 35% discount was appropriate due to the lack of marketability of stock in closely held corporations. Harwood testified that the per share value was $1,242.00 and that the going-concern value of All Steel was $1,366,244 as of April 30, 1975, which was less than the amount in the hands of the receiver after the "wind down" of the business. Harwood further testified that during the first quarter of 1975, it was not unusual for stock to be trading below book value, especially in the steel service center industry.
The trial court found that the fair and equitable way to value All Steel was to determine the value of each share as of May 1975. Relying more on Harwood's evaluation, the court set the value of each share at $3,474.24 and then applied most of Harwood's discounting factors to arrive at a final per share value of $1,910.83. The court applied a 45% discount on the value of All Steel stock. All Steel's going-concern value was set at $2,101,913 as of May 1975, or almost $99,500 less than the $2,201,412.85 in the hands of the receiver. The court found that Leo's actions had not been malicious or fraudulent, but were instead the actions of a "frustrated, impatient and imprudent young man" whose "ill advised" actions had caused damage to Scott and to All Steel. Leo was ordered to transfer 200 shares of his All Steel stock to Scott in full satisfaction of the damages done to him and to transfer 200 shares of his stock to All Steel in full satisfaction of the damages done to it. All Steel was ordered to redeem Leo's remaining 150 shares for a total of $286,624.50. The receivership was to be terminated and the remaining assets, which consisted entirely of cash, and the records of All Steel were to be turned over to Scott.
• 1 Initially, we must address Scott's contention that the trial court failed to interpret properly and apply the findings of this court in that additional evidence concerning Leo's reasons for closing All Steel and placing its assets in the hands of a receiver was admitted at retrial and considered by the trial court. Scott argues that the prior decision of this court foreclosed any additional evidence concerning the merits of Leo's actions, and that the law of the case required the trial court to address itself only to the issue of the amount of damage done to Scott and All Steel. Scott contends that the prior finding of this court was that, as a matter of law, Leo had breached his fiduciary duty and was liable for damages.
Although the findings of an appellate court are final on all questions decided (Zokoych v. Spalding (1980), 84 Ill. App.3d 661, 667, 405 N.E.2d 1220, 1225), our prior decision made no express finding as to Leo's liability. Questions of law decided in a previous appeal are binding on both the trial court and this court. (Zokoych v. Spalding (1980), 84 Ill. App.3d 661, 667, 405 N.E.2d 1220, 1225.) However, the mere presentation of an issue to a reviewing court does not foreclose relitigation on "issues of fact [citations], and matters concerning the merits of the controversy between the parties which were presented to but not decided on by the appellate court [which] can be relitigated on remand." (Zokoych v. Spalding (1980), 84 Ill. App.3d 661, 667, 405 N.E.2d 1220, 1225.) The only issue we decided in the prior appeal was that the evidence presented to the trial court was insufficient to prove either a deadlock or irreparable injury within the meaning of section 86(a)(1) of the Business Corporation Act of 1933, as amended (Ill. Rev. Stat. 1975, ch. 32, par. 157.86(a)(1)), and that dissolution and liquidation of the corporation was unjustified. (Callier v. Callier (1978), 61 Ill. App.3d 1011, 1015, 378 N.E.2d 405, 409.) "Dissolution is * * * a harsh remedy * * * to be used only as a last resort." (2 F. O'Neal, Close Corporations sec. 9.03, at 9 (2d ed. 1971).) Although we noted what appeared to be a breach of fiduciary duty, we left it to the trial court to balance the equities between the parties and to fashion a proper remedy.
• 2 Of primary importance to our determination are the trial court's findings as to the going-concern value of All Steel as of May 1, 1975. As noted in our prior decision, it would be manifestly unfair to allow one 50% shareholder "to siphon off the going-concern value of All Steel, leaving the 50-percent shareholder who was opposed to dissolution with only half of whatever assets are in the control of the receiver." (Callier v. Callier (1978), 61 Ill. App.3d 1011, 1015, 378 N.E.2d 405, 409.) At the outset, we note that the trial court findings will not be reversed unless ...