Fundamentals of BV in PA: Glosser Bros. II
This post is the second in a series dedicated to historical legal precedents on business valuation in Pennsylvania. The factual background for this case, Glosser Bros., is discussed in my post last week. This is part II:
In addition to their argument that trial court should have considered actual stock transactions, the appellants in Glosser Bros. also complained about the expert testimony given by the dissenters’ accountant, who calculated the company’s net asset value. In particular, the Company argued that the trial court should have excluded the expert’s testimony to the extent that he had relied upon an equipment appraisal prepared by an appraiser (at the Company’s request) who did not testify at trial. The Company also complained that the plaintiffs’ accountant was not qualified to determine the value of leases held by the Company.
The dissenting shareholders argued that their expert’s testimony about the equipment appraisal was admissible, despite being hearsay, because it had been relied upon by the Company in its proxy statement for the merger and considered by management in adopting a certain tax treatment of the transaction. As such, they argued, it was an adoptive admission of the Company. Furthermore, the dissenters argued, it was the type of evidence on which business valuation professionals generally rely in the practice of their profession, and thus admissible under Pa.R.E. 703.
The trial court, apparently, had repeated the refrain frequently heard by lawyers who object to the admission of evidence: that the evidence would be admitted and the court would decide what weight to assign to it. The Superior Court generally approved this ruling, noting that in non-jury trials, it might be desirable for the trial court to have as much evidence before it as possible.
The Superior Court first rejected the Company’s argument that the dissenters’ expert was not qualified to appraise the leases. Observing that the accountant had been qualified as an expert on the issue of stock valuation, the Superior Court cited Pennsyvlania’s liberal standard for qualification of an expert. The Court also noted that the Company itself had used the same methods for its own purposes. Therefore, the Superior Court refused to disqualify the dissenters’ expert on this issue.
As for the equipment appraisal on which the business valuator relied, the Superior Court agreed that it would be hearsay evidence if offered to prove the truth of the matters that it contained. The Superior Court held that the Company’s use and reliance on the equipment appraiser’s opinion did not amount to an adoptive admission. Yet, the Superior Court did not overrule the trial court’s decision to admit the testimony of the plaintiff’s valuation expert, including the portions of his testimony that relied upon the hearsay equipment appraisal.
Reviewing the development of evidentiary procedure, the Superior Court noted that the expert testimony exception to the hearsay rule had been extended beyond medical experts, to experts in other fields. See, e.g., Pittsburgh Outdoor Advertising Corp. Appeal, 440 Pa. 321, 272 A.2d 163 (1970); Steinhauer v. Wilson, 485 A.2d 477 (Pa.Super.1984). Yet, the Superior Court in Glosser Bros. placed significant weight on the fact that the equipment appraisal had been prepared for the Company itself and was not the only equipment appraisal that the plaintiff’s valuation expert had considered. The testifying expert had exercised his own independent judgment by giving greater weight to the out-of-court equipment appraisal than to another appraisal prepared by an expert who testified at trial. Finding that the equipment appraisal carried its own “circumstantial guarantee of trustworthiness,” the Superior Court refused to exclude the testimony of the plaintiff’s business valuation who relied on the hearsay evidence.