New Jersey’s Appellate Division recently issued an unpublished decision on dissenting shareholders’ rights in the context of a sale of substantially all of a corporation’s assets. In Holiday Medical Center, Inc. v. Weisman, plaintiff Markind was a 5 percent shareholder of Holiday (HMC), a nursing home facility. She dissented from the decision of the HMC board of directors to approve the sale of HMC’s assets, including its land, building and facilities, to a non-profit school for $8 million, conditioned on HMC making a charitable contribution to the school of approximately $3 million of the sale proceeds. Dissatisfied with the board’s decision, Markind brought a dissenter’s rights action under N.J.S.A. 14A:11-7 to determine the fair value of her shares.
The trial court appointed CBIZ Valuation Group as an independent appraiser. CBIZ appraised HMC in two ways: (1) as a “going concern,” valued at $5.45 million, and (2) using liquidation value of $7 million. The trial judge adopted a “going concern” approach, reasoning that “what the majority shareholders stripped plaintiff of was her ongoing interest in [HMC], and it is the fair value of that interest that the Statute entitles her to.” The court then found that HMC sold its right to continue in business for $8 million in an arms-length transaction, a condition of which was the charitable contribution, and that this established fair value.
In its decision, the Appellate Division clarified some murky areas of the law. First, it held that the dissenting shareholder’s statutory appraisal remedy did not apply to dissents only from corporate mergers, but was broadly applicable to any dissent from the sale or other disposition of substantially all of the assets of the corporation made other than in the regular course of business. That right included the right to object to the value received by the shareholders, which in the Holiday case included the amount of cash and the charitable deduction.
Second, the Appellate Division confirmed the breadth of the trial court’s discretion to determine fair value, noting that the trial court’s determination would be disturbed only if it were clearly erroneous or an abuse of discretion. The appeals court agreed with the lower court that fair value was to be determined generally on a “going concern” basis because the assumption is that the dissenter would be willing to continue the investment had the merger or sale of assets not occurred. While it approved the trial judge’s use of the CBIZ valuation to corroborate the $8 million sale price as a measure of fair value, the court criticized him for not explaining why he accepted the sale transaction price (as reduced by the charitable contribution and the outstanding mortgage obligation) rather than the CBIZ “going concern” value, which would have resulted in a substantial increase in the value of the corporation.
The appellate panel also found that the trial court did not address Markind’s claim that the charitable contribution benefited only those shareholders with other sources of income that could be sheltered from taxation and not her, and that she should have received a higher value for her shares. Appearing to suggest that such an adjustment might be appropriate, the Appellate Division signaled that it would more closely scrutinize the fairness of transactions in which the majority shareholders received more valuable benefits than the minority shareholders.
Finally, the appeals court noted that the trial judge had not fully considered Markind’s request for an award of counsel fees and expenses. The Appellate Division hinted such an award might be appropriate because plaintiff had been forced to file a complaint to receive fair value for her stock. Because clarification was needed on a number of issues, the appeals court remanded the case to the trial court for further consideration.