The Tennessee Supreme Court overruled three decades of precedent in Athlon Sports Communications, Inc. v. Duggan, giving trial courts broad discretion in the method used to determine the “fair value” of shares in “dissenters’ rights” actions.
When a closely held Tennessee corporation seeks to undergo a structural change such as a merger, dissenting minority shareholders are afforded a statutory “appraisal remedy” pursuant to Tennessee Code Annotated § 48-23-101, et seq. This “dissenters’ rights” statute allows dissenting shareholders to escape the involuntarily altered investment with the “fair value” of their shares, plus accrued interest. But “fair value” means “the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects” under Tennessee Code Annotated § 48-23-101(4). This is not the “fair market value” of a bargained-for exchange between motivated buyers and sellers. If the corporation and dissenting shareholders cannot agree on the shares’ “fair value,” the corporation can commence a proceeding under Section 48-23-301, petitioning the court to determine the “fair value.” As expected, the abstract notion of “fair value” has proven elusive to courts, corporations, and shareholders alike.
Though the statute is silent as to which methods courts should use to determine “fair value,” the Tennessee Supreme Court implicitly mandated the “Delaware Block Method” in 1983. Through Blasingame v. American Materials, Inc., Tennessee “adopt[ed] the Delaware rule requiring the use of [asset value, market value, and earnings value] in determining the fair value of a dissenting minority stockholder’s shares.” However, that same year, the Delaware Supreme Court in Weinberger v. UOP, Inc. abandoned exclusive application of the Delaware Block Method in favor of a liberal approach aligned with generally acceptable methods in the financial community. Although Tennessee courts generally look to Delaware law in unsettled matters of corporate law, Tennessee did not divest itself of exclusive use of the Delaware Block Method for over three decades.
The court in Athlon Sports elected to overrule Blasingame and allow trial courts to consider alternative valuation methods, although the courts may still apply the Delaware Block Method when appropriate. Specifically, the court adopted the Weinberger approach, allowing “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court.”
Moving forward, corporations, dissenting shareholders, and courts may now consider other valuation methods for “fair value” that include projections of future value, provided that they are provable and not speculative. Likewise, Tennessee trial and appellate courts may find themselves determining the “strike price” of speculation when it comes to weighing elements of future value now that Athlon Sports has “rung the opening bell” for a new dissenters’ rights regime.