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Hintmann v. Weber

Court of Chancery of Delaware
Mar 26, 1999
C.A. No. 12839-NC (Del. Ch. Mar. 26, 1999)

Opinion

C.A. No. 12839-NC.

Submitted: December 4, 1998.

Decided: March 26, 1999.

Donald E. Reid Morris, Nichols, Arsht Tunnell Wilmington, DE

Daniel A. Dreisbach Richards, Layton Finger Wilmington, DE


Counsel:

In my February 17, 1998 Opinion, I ruled on the petition of Michael W. Hintmann, Carolyn Ottenad, Marion R. Medic and Edward F. Devine (collectively "Petitioners") for appraisal of their ESOP-held shares in Weber Industries, Inc. (Industries). Industries owned one asset, 100% of the outstanding Fred Weber, Inc. ("FWI") class A common stock. Industries merged into FWI on September 15, 1992. This § 262 action followed. The parties have not been able to resolve certain issues left outstanding by my 1998 Opinion. This letter settles some of those issues and appoints a Special Master to resolve the remainder.

Hintmann v. Fred Weber, Inc. , Del. Ch., C.A. No. 12839, mem. op., Steele, V.C. (Feb. 17, 1998) [ 1998 Opinion ].

I. BACKGROUND

FWI is engaged in the construction, construction materials and landfill businesses in Missouri. FWI has two divisions, a construction division, which specializes in highway construction, and a materials division, which specializes in the mining and processing of construction aggregates. Industries was formed in 1986 to hold FWI Class A common stock. Industries ceased to exist on September 15, 1992, when it merged into FWI.

On the date of the merger, FWI was capitalized with two classes of common stock, Class A and Class B. Industries owned 100% of the Class A shares, and 129 FWI employees owned 100% of the Class B shares. Industries had one class of common stock. The Fred Weber, Inc. Employee Stock Ownership Plan ("ESOP") owned 95% of Industries' common shares for the benefit of FWI employees. The ESOP participants who voted in favor of the merger received $127.50 in cash plus one share of newly-issued FWI non-voting preferred stock with a stated value of $132.50 for each share of Industries common stock — for a total consideration of $260 per share.

Dividends accumulate daily on the stated value of the preferred shares at the rate of 10% per annum, payable quarterly. The preferred stock participates in any increase in the value of FWI's Class A common up to a maximum value of $180 per share. Shareholders have the option of converting their preferred shares to FWI Class A common.

Before the merger, Industries' board requested fairness opinions from two companies, A.G. Edwards Sons, Inc. ("A.G. Edwards") and Rubin, Brown, Gornstein Co. A.G. Edwards had valued Industries' shares annually, in accordance with ERISA requirements, for six years preceding the merger. In its most recent annual valuation before the merger, completed January 31, 1992, A.G. Edwards calculated a value of $260 per share. Both companies concluded that the merger provided fair consideration to the ESOP participants.

The Employee Retirement Income Security Act of 1974 ("ERISA") governs qualified retirement plans such as FWI's ESOP. FWI structured the merger to allow ESOP participants to seek appraisal. Therefore, I encounter no federal preemption issues.

Notwithstanding the fairness opinions, petitioners voted their shares against the merger and instituted this appraisal action. Petitioner Devine also seeks appraisal of his FWI Class B common shares. The parties' appraisal experts noted that, because Industries was a holding company whose primary asset was 100% of FWI's Class A common stock, the value of Petitioners' shares depended upon the value of FWI's Class A common stock, which required the valuation of FWI as a whole. Thus, the experts expressed their opinions concerning the value of Petitioners' shares in terms of the value of FWI's Class A common shares.

The shares were actually voted by a trustee at the direction of an ESOP Advisory Committee, which made most decisions involving the shares. Employees could direct the ESOP trustee's vote in only limited circumstances, which included a merger involving FWI.

Petitioners argue that Respondent's expert did not value FWI as a whole, but valued only the Class A common shares. Petitioners are mistaken. As will be explained, infra, both experts determined the value of FWI as a going concern and subtracted the value of the Class B common shares to reveal the value of the Class A common shares.

Petitioners' expert, Ben Buettell, of Houlihan, Lokey, Howard Zukin, Inc., valued FWI's Class A common stock at $391 per share on the date of the merger. Respondent's expert, Richard Braun, of Williamette Management Associates ("WMA"), valued FWI's Class A common stock at $271 per share on the date of the merger. Both experts computed the value of FWI by calculating the simple average of the results of discounted cash flow and market capitalization analyses. Both testified that their approaches were substantially similar and that the discounted cash flow and market capitalization valuation methods were generally accepted in the field. The experts averaged the results of the two approaches and subtracted the value of FWI's Class B common shares to determine the value of the Class A common shares. They divided that value by the number of outstanding Class A shares to arrive at the per share value.

Although the two experts testified that they used the same valuation methods, Braun called his market approach valuation by a different name, the Guideline Publicly Traded Companies Method.

In my 1998 Opinion, I made the following rulings:

(1) FWI's cost of equity was 16.8%;

(2) FWI's cost of debt should be calculated using FWI's actual cost of debt;
(3) FWI's weight adjusted cost of capital ("WACC") was 98% its cost of equity and 2% its cost of debt;

(4) I rejected a 3% company-specific risk premium;

(5) I adopted FWI's position that its cash and cash equivalents should be treated as operating assets;
(6) I added a 20% premium to the value of the FWI shares to reflect the ESOP's 90% control;
(7) I ordered the parties to appraise the Class B stock according to § 262 methods, not the certificate's redemption provision;
(8) I directed the parties to rely on the most recent July 21, 1992 financial data when preparing the final judgment;
(9) I ordered FWI to pay monthly compounded interest on their shares from the merger date to the payment date as a simple average of FWI's cost of debt and the prudent investor rate;
(10) I set the prudent investor rate equal to the actual interest rate earned by petitioners from their funds invested in the Money Market Fund, the Bond Fund, the Index Fund, and the Value Equity Fund after deducting applicable fees;
(11) I ordered the parties to recalculate FWI's cost of debt by compiling its actual interest rates for loans from banks and other third parties;
(12) I directed them to calculate a prudent investor rate for the Common B shares using the same cost of debt, but without relying on the actual rate earned on the four funds; and
(13) I held that FWI did not engage in bad faith for which I might award attorneys' fees, although I allowed the parties to stipulate to an award that I would put into my final order.

II. PARTIES' CONTENTIONS MY RULINGS

I expected the parties to work out the remaining differences between them and complete the tasks specified in my 1998 Opinion. The parties are unable to do so, disputing the following, largely technical, issues. Those issues that I cannot resolve today, I leave for the Special Master.

A. DCF Recalculation

The parties disagree over how to recalculate the fair value of FWI under discount cash flow analysis. Petitioners calculate the number to be $81,064,000, and FWI $72,769,000. FWI adds that any award needs to be adjusted to reflect partial distributions made to Devine and Medic. I direct the parties to describe their DCF analysis' data and methodology to the Special Master. The parties should also provide their respective positions on how to deduct the value of early distributions from the award. The Special Master shall choose the superior DCF analysis and make the appropriate adjustments for partial distributions.

B. Cost of Debt

Although only 2% of FWI's WACC, the parties bicker over the calculation of FWI's cost of debt. FWI seeks to avoid interest rates used in certain leases and use low interest rates awarded by manufacturers in calculating its cost of debt. Petitioners object to both.

First, FWI seeks to recharacterize loan data that it used at trial as leases. Although my 1998 Opinion envisioned that the parties might supplement the record with evidence of FWI's cost of debt during the period between the date of the merger and January 1993, the trial record is closed as to data already presented. I reject FWI's attempt to recharacterize the evidence post trial.

Second, Petitioners take the position that manufacturers offer low interest rates to customers as an incentive to buy and often disguise part of the interest rate actually charged by hiking up the item's price tag. I conclude that a manufacturer's low interest rate incentive is still a third party deal that constitutes part of a business' cost of debt. If the interest rate is hidden in the purchase price, however, that hidden cost must be broken out and added into the actual interest rate in order to determine the business' real cost of debt.

If FWI wishes to use the interest rate charged by the manufacturer, FWI must obtain the market price of the product (at the time of purchase) for an immediate cash sale, determine the total amount of FWI's stream of principal and interest payments, and calculate the actual interest rate being charged for the product. FWI shall present this data to the Special Master and petitioners may present evidence rebutting FWI's asserted market price. The Special Master shall choose the more accurate market price and calculate the real interest rate for the loan. That actual interest rate shall be added into FWI's cost of debt calculation. (In light of the minor role of this figure in the overall fair value calculation, however, FWI may opt to delete any manufacturer's loan from its pool of loan data, if petitioners oppose its use and deriving the actual interest rate is too cumbersome.)

C. Four funds

The parties disagree over how to calculate the prudent investor rate based on the performance of petitioners' investments in the four ESOP funds. FWI criticizes petitioner's rounding up of fractions. That problem is solved by having the parties calculate all figures to one hundredths of the relevant unit. To the extent necessary, they shall round up from .005 to .009 and down for .001 to.004.

Second, FWI asserts that the Court erred in holding that the petitioners invested funds in the Value Equity fund during the relevant period and seeks to substitute the Balanced fund in determining the prudent investor rate. It appears that I "misapprehended a fact" in my 1998 Opinion when I directed the parties to use petitioners' actual distribution of funds between four funds when the Value Equity fund may not have been available. The parties shall submit their positions on this matter to the Special Master.

The Special Master may supplement the trial record on this issue and rule on what distribution of funds should be used to calculate the prudent investor rate. If the 1998 Opinion's solution is unworkable, the Special Master shall devise a similar methodology to calculate the prudent investor rate. Although a factual error may prevent the mechanical application of the 1998 Opinion's methodology, the underlying purpose of that holding is still sound. The Special Master should correct the error in keeping with my original reasoning or petition for further instructions.

Third, petitioners dispute the management fees assessed against the funds by FWI. It is impossible for me to evaluate the merits of that argument after trial, so it must be heard by the Special Master. FWI shall document the fees it assesses and Petitioners may challenge any or all of them. The Special Master shall determine what effect this may have on the outcome.

D. Class B Common Stock

The parties appear to agree that the price of the Class B Common stock should be $202.83 per share. FWI calculates Mr. Devine's 1886 shares to be worth $382,537.38. Petioners calculate the total value of the Class B shares to be $3,995,000. If these figures are irreconciliable, the Special Master should correct the discrepancy.

I held that the prudent investor rate for Devine's Class B should be calculated independently from the rate for the Class A. The parties shall present their proposed rates to the Special Master, who shall choose one, fashion his or her own, or select the legal rate if all else fails.

E. Attorneys' Fees

Petitioners ask me to order the Trustee to reimburse them for their costs and fees or, at the least, to order that their fees and costs be deducted pro rata from the accounts of all dissenting shareholders. I ruled on this matter in my 1998 Opinion:

I find that Petitioners have failed to establish Respondent's bad faith by a preponderance of the evidence and that there is no basis upon which I may award attorneys' fees and costs other than as the parties may agree. I shall not, however, prevent the parties from working out some other arrangement for the payment of Petitioners' attorneys' fees and costs. If the parties can reach an agreement on this issue, they may include those terms in a proposed final Order, and I will approve it. I shall express no opinion, however, on the enforceability of those terms under ERISA or other applicable federal law.

* * *

[A]ttorneys' fees and costs are not a part of the Court's award, but the parties may agree that Petitioners may have access to the funds awarded as fair value in this opinion and may use those funds to pay such fees and costs.

1998 Opinion , supra note 1, mem. op. at 36-38.

That ruling still stands. Petitioners' requests that their fees and costs be paid by the trustee is denied.

III. SPECIAL MASTER

I appoint a Special Master who shall submit a final report to this Court. The final report shall address the issues outlined above and any outstanding issues necessary to appraise FWI's common stock. The final report shall state the fair value of FWI's Class A and Class B shares and each petitioners' award.

Cede Co. v. Technicolor, Inc. , Del. Ch., C.A. No. 7129, mem. op. at 7, Chandler, C. (Jan. 29, 1999).

The parties shall each submit a report to the Special Master outlining their respective positions on the outstanding issues in this matter. The Special Master shall consider the issues and request any additional information, briefing, or oral argument that he or she deems necessary. Except for the limited authority granted above to gather new evidence on discrete issues for which the current record is inadequate, the Special Master shall rely on the trial record and my findings of fact. The Special Master shall submit a draft report to the parties to which they may take exceptions. The Special Master shall consider the exceptions and submit a final report that may incorporate or reject those exceptions.

The parties shall submit their final exceptions to me. Either party may request a hearing before I rule on the final report. At the parties' request, the Special Master shall appear at the hearing to explain the final report. Either party may examine the Special Master at the hearing. After considering the final report, the Special Master's explanations, the parties' exceptions, and their oral arguments, I shall rule on any remaining issues in this matter.

IV. MOTION TO STRIKE

Petitioners ask this Court to strike certain portions of FWI's briefs in which FWI discusses Class A Common stock valuations raised in post-trial settlement negotiations. FWI believes that the information was necessary to rebut certain references to post-trial settlement negotiations that petitioners raised in their opening brief. I conclude that facts pertaining to post-trial settlement negotiations are not necessary to resolution of the outstanding issues. Bringing a party's settlement position before the Court may prejudice the party's trial position and chill future settlement talks. The settlement negotiations in this matter serve no useful evidentiary purpose and allowing them into the record would create harmful precedent. I strike all mention of post-trial settlement negotiations from both sides' briefs. No mention of settlement should be made to the Special Master.

The parties' briefs, therefore, may not be shown to the Special Master before all reference to settlement is redacted to the parties' mutual satisfaction.

V. CONCLUSION

If the parties cannot agree upon a neutral expert to serve as Special Master, each shall submit the name of one candidate to me within 15 workdays of this Letter. I shall then act. The Special Master shall contact the parties and schedule further appropriate proceedings. If the parties have any questions about how to proceed, they should swiftly arrange a telephone conference with the Court.

IT IS SO ORDERED.


Summaries of

Hintmann v. Weber

Court of Chancery of Delaware
Mar 26, 1999
C.A. No. 12839-NC (Del. Ch. Mar. 26, 1999)
Case details for

Hintmann v. Weber

Case Details

Full title:Hintmann v. Weber

Court:Court of Chancery of Delaware

Date published: Mar 26, 1999

Citations

C.A. No. 12839-NC (Del. Ch. Mar. 26, 1999)