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12/28/88 Aaron Levine, As Trustee v. Aaron Levine

December 28, 1988




535 N.E.2d 927, 179 Ill. App. 3d 911, 129 Ill. Dec. 162 1988.IL.1880

Appeal from the Circuit Court of Cook County; the Hon. Arthur L. Dunne, Judge, presiding.


JUSTICE McNAMARA delivered the opinion of the court. FREEMAN, P.J., and RIZZI, J., concur.


Petitioner, Independence Tube Corporation, filed a petition in the trial court to determine the value of 100 Class A shares of its stock held by the respondent, Aaron Levine, as trustee for Philip, Christopher, Heather, and Steven Yontez. After a bench trial, the trial court entered an order assessing the fair value of Independence's Class A shares at $550 per share and awarding judgment interest at the rate of 6% from April 1986. The trial court denied Levine's request for expenses and costs incurred in connection with the proceeding. Levine appeals, contending that the trial court erred in discounting the fair value of Independence's shares; the trial court's valuation of Independence's shares was against the manifest weight of the evidence; and that the trial court erred in denying Levine the expenses of his appraiser and attorney.

Independence is a closely held Illinois corporation engaged in the manufacture of welded steel tubing. Prior to March 20, 1986, it had issued and had outstanding 14,479 shares of Class A stock and 318,600 shares of Class B stock. On March 20, 1986, Independence sent its shareholders a notice of a shareholders' meeting to be held on April 10, 1986. The notice recited that the purpose of the meeting was to vote on a proposed amendment to Independence's articles of incorporation. The amendment would enable the company to make a subchapter S election by making Class A and Class B shares equal in economic respects.

Independence included with the notice an offer to purchase its Class A shares for $500 per share and its Class B shares for $25 per share. David Grohne, Independence's president, testified that the offer was made both to reduce the number of shareholders to 35 in order to qualify for subchapter S status and to allow those shareholders who wished to sell their closely held and nontraded stock an opportunity to do so. Grohne stated that the offer price for both classes of stock was determined by Independence's three directors. This determination involved a review of Independence's audited financial statements, bank appraisals for the preceding three years, two valuations acceptable to the Internal Revenue Service, recent sales of its stock, and each director's personal knowledge of Independence and its past performance. The goal was to set a fair price, high enough to encourage sufficient tenders so that Independence could qualify for subchapter S status, but not so high as to shortchange those who wished to remain shareholders. The three directors each determined a range of acceptable values. They agreed that $500 per share, common to each of their opinions of value, was a fair price to offer.

On April 9, 1986, Levine formally elected to Dissent from the proposed amendment pursuant to sections 11.65(a)(3)(i) and 11.70 of the Illinois Business Corporation Act of 1983 (Ill. Rev. Stat. 1985, ch. 32, par. 1.01 et seq.), and demanded payment for the value of the 500 Class A shares which he held as trustee. On April 10, 1986, the shareholders approved the proposed amendment by the requisite vote of holders of both classes of shares. On May 14, 1986, Independence purchased 8,925 Class A shares and 31,400 Class B shares. Among those tendered and purchased were 400 of the 500 Class A shares held by Levine. On May 20, 1986, Independence filed the amendment to the articles of incorporation with the Illinois Secretary of State.

On May 21, 1986, Independence notified Levine in writing that, in its opinion, the value of the 100 Class A shares held by him was $500 per share. Independence committed to deliver a check for $50,000 upon receipt of the certificate for Levine's shares. Levine informed Independence that, in his opinion, the shares were worth $774.51 per share and accordingly demanded payment of an additional $27,451. Independence responded that it intended to file a petition in the circuit court to determine the value of the shares as it appeared unlikely that Levine and Independence would reach an agreement as to value. At that time, Independence tendered its check in the sum of $50,000. On June 30, 1986, Independence filed a petition seeking an appraisal of Levine's 100 Class A shares.

At trial, each side presented testimony as to the value of Levine's shares. Independence offered the testimony of Robert Schweihs, the national director of the valuation and appraisal services at Touche Ross. Schweihs determined that the value of a Class A share was $500. Schweihs valued the shares as of May 20, 1986, the effective date of the amendment to the articles of incorporation.

Schweihs testified that he began his valuation by conducting a background investigation of Independence. He toured the facility, examined financial statements for the preceding five years, and reviewed information on shipments, price lists, inventory levels, customer profiles, strength of Independence's markets, growth prospects, prospective budgets, expansion plans, business plans, and strategic plans. Schweihs then applied four valuation methods to arrive at the following range of values: (1) discounted net cash flow -- $546 per share; (2) asset accumulation -- $509 per share; (3) market comparable -- $500 per share; and (4) capital market -- $453 per share. Under each method, Schweihs applied a 20% discount factor for lack of market. Schweihs arrived at his $500 valuation by weighting the four approaches, giving the most weight to that approach which best reflected real life transactions, the market comparable approach. The market comparable approach evaluates other sales of the same or similar property. Schweihs believed that this case was well suited to the market comparable approach as there were other transactions, including contemporaneous ones, involving Class A shares of Independence.

Edward M. Murray, Jr., a vice-president of the Continental Bank of Illinois, also testified for Independence. In the preceding three years he had conducted valuations of Independence's Class A stock and found values as follows: 1983 -- $539 per share; 1984 -- $410 per share; and 1985 -- $540 per share. These values were established after a review of Independence's audited financial statements and income tax returns for the preceding five years, a tour of the facility, an interview of management, and the gathering of other information.

Jon Paulsen, the midwest regional director of appraisal services for Arthur Young & Co., testified for Levine. Paulsen used two approaches to value Independence's stock, the market comparable approach and the discounted cash flow approach. Paulsen valued the stock as of March 20, 1986. Under the market comparable approach, Paulsen arrived at a value of $1,080 per share; under the discounted cash flow approach, Paulsen arrived at a value of $1,226 per share. Paulsen opined that the value of Independence's Class A shares as of March 20, 1986, was $1,000 per share. Paulsen later valued the shares as of May 20, 1986, and determined a value of $1,405. Paulsen examined various factors in arriving at his valuations, including adjusted earnings per share, various financial statistics, cash flow, projected revenue growth as well as historical growth patterns, projected expenses, and estimated taxes. He testified that in his calculations, he applied a discount for lack of market. Paulsen did not apply a discount for the minority posture of the shares because each of the approaches which he used assumes a minority interest.

The trial court concluded the value of Independence's Class A shares as of March 20, 1986, was $550 per share. The trial court arrived at this value by considering the factors set forth in Stewart v. D.J. Stewart & Co. (1976), 37 Ill. App. 3d 848, 346 N.E.2d 475, as well as the factors set forth in Internal Revenue Service bulletins. The trial court specifically named the following factors: nature and history of the business, general economic outlook and the outlook of the specific industry, book value of the stock, financial condition of the business, earning capacity, dividend-paying capacity, value of Independence's goodwill and other intangibles, sales of stock, size of the block of stock to be valued, and market price of stock of corporations engaged in like businesses. The trial court determined that its valuation did not ...

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