APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. HONORABLE EVERETTE A. BRADEN, JUDGE PRESIDING.
Rehearing Denied July 17, 1997. As Modified on Denial of Rehearing July 24, 1997. Released for Publication August 5, 1997.
The Honorable Justice Wolfson delivered the opinion of the court. Campbell and Buckley, JJ., concur.
The opinion of the court was delivered by: Wolfson
MODIFIED ON DENIAL OF PETITION FOR REHEARING
The Honorable Justice WOLFSON delivered the opinion of the court:
The minority shareholders in this case had no choice: they had to sell their shares to the majority. This dispute concerns the value of the minority shares. To resolve the issue, we have to determine the meaning of the words "fair value" in the Business Corporation Act.
On January 5, 1988, Weigel Broadcasting Co. (Weigel) petitioned the court to determine the "fair value" of its common stock, in accord with section 11.70 of the Business Corporation Act (805 ILCS 5/11.70 (West 1992)), after a number of minority shareholders dissented from the company's plan to buy them out in a reverse stock split. The trial court valued the stock at $126 per share and awarded 7% prejudgment interest. Some of the dissenting minority shareholders have appealed, arguing that the trial court valued the stock too low. They also ask for prejudgment interest at the rate of 9.59%.
Weigel cross-appeals the prejudgment interest awarded, arguing for a 5% statutory rate.
We affirm the trial court's valuation of the shares and determination of the applicable interest rate, although we modify the trial court's view of how long interest should run.
In 1987, Weigel was a company engaged in the business of commercial television broadcasting. Incorporated in Illinois with its principal business office in Chicago, Weigel operated two television stations, WCIU-TV Channel 26 in Chicago and W55AS Channel 55 in Milwaukee, Wisconsin.
On November 16, 1987, Weigel's Board of Directors sent its shareholders a notice informing them that the Board was proposing a "reverse stock split." According to the proposal, 1,750 shares of "old" Weigel stock would be redeemable for one share of "new" Weigel stock. Anyone holding less that 1,750 shares would turn in their shares for cash. No fractional shares would be allowed.
At the time of the proposed reverse stock split, Weigel had 88,167 outstanding shares of "old" common stock. Howard Shapiro, then-President of Weigel, and certain members of his family were the beneficial owners of approximately 83% of these outstanding shares. The remaining 17% of the "old" shares were owned by 143 shareholders.
In an Information Statement sent to the minority shareholders it was explained that the reverse stock split would have the effect of eliminating all of the minority shareholders and would make Shapiro and his family members the owners of all of the outstanding "new" shares of the company. The purpose for the proposed action was two-fold: to reduce the number of shareholders so that the corporation could qualify for Sub-Chapter S status and to eliminate the administrative expense and delay associated with notifying minority shareholders of all corporate actions when the minority shareholders, even collectively, were unable to control or direct the corporation's business affairs.
Due to the conflict of interest between the controlling shareholders and the minority shareholders, the Board of Directors hired an independent valuation consulting firm, Valtec, to determine the fair value of Weigel stock. Based on Valtec's valuation, Weigel offered $115 per "old" share of stock as the cash buy-out price.
Weigel's Board of Directors resolved, as provided for in section 11.65(a)(4) of the Business Corporation Act of 1983 (BCA)(805 ILCS 5/11.65(a)(4) (West 1992)), that its shareholders could dissent and obtain payment for their shares in accord with section 11.70 of the BCA. In an Information Statement dated November 23, 1987, the minority shareholders were informed of their right to dissent from the estimated fair value that Weigel had determined.
The Board of Directors reserved the right not to proceed with the reverse stock split if enough minority shareholders declined to accept the per-share offer. After receiving the Notice and Information Statement, 125 of the 143 minority shareholders opted to accept the $115 per share cash buy-out price. Because a high number of shareholders accepted the per share offer, Weigel effected the reverse stock split on December 31, 1987.
On January 5, 1988, Weigel filed a petition in the circuit court of Cook County, pursuant to section 11.70(f) of the Act, asking the court to determine and declare the fair value of Weigel's common shares of stock for the remaining minority shareholders who chose to exercise their dissenter's rights.
At a hearing on the petition, Weigel presented the testimony of its expert, John McCluskey, who valued the stock using a discounted cash flow method and a market approach. In McCluskey's opinion, all factors bearing on the value of the stock, including illiquidity (the fact that there was no open market for the shares) and minority (the fact that the blocks of shares held by the dissenters were small and did not represent controlling interest over the company), had to be considered when determining fair value. Since there was no plan to liquidate the corporation, and since there had never been any payment of dividends on the common shares and there was no expectation that dividends would be paid in the future, McCluskey opined that Weigel's per share offer of $115 was a fair value for the stock held by the minority dissenters. This figure represented the net asset value of the shares, to which a 50% discount had been applied due to the illiquidity and minority of the shares.
The dissenting minority shareholders also presented an expert, Thomas Buono. Buono, using three different models, determined the value of the Weigel corporation. He then contended that the fair value of the shares was a simple pro rata division of the corporate assets, without any discounts. Buono valued the shares at $578.41. Discounts for minority and illiquidity of the shares, he said, were inappropriate.
After hearing all of the evidence, the court specifically stated that it considered a number of factors in evaluating the Weigel stock, including the nature and history of the business, its general economic outlook and the economic outlook for the specific industry, the book value of the stock, the business's financial condition and earning capacity and dividend paying history, as well as recent sales of stock. The court went on to state that "the testimony of Mr. McCluskey has a more credible and relevant impact on these factors as compared to the ...