Fundamentals of BV in PA: Glosser Bros.
This post is the first of series aimed at reviewing the historical legal decisions concerning business valuation in Pennsylvania. Since these are state court cases, most arise from shareholder disputes, divorces, and condemnation cases. Some are stale, some vital, and some questionable, but all are worth reviewing. The first installment, concerning Glosser Bros., will be presented in two parts:
One of the leading cases on business valuation in Pennsylvania is In re Glosser Bros., Inc., 555 A.2d 129 (Pa.Super.1989), a dissenting shareholder action arising from the management-led buyout of a regional chain of discount department stores, outlet stores and grocery stores. Three of the company’s shareholders filed suit against the acquirer, claiming that the share price paid by acquirer was too low and seeking an appraisal of the stock. The standard of value in such cases is “fair value” as provided by Section 515 of the Pennsylvania Business Corporation Law of 1988.
Glosser Brothers was a publicly-traded stock listed on the American Stock Exchange. In the months immediately preceding the merger, the shares traded around $14 per share. The stock had never traded for more than $19 per share. The company that acquired Glosser Brothers in 1985 paid $20 per share.
The Cambria County trial court did not appoint an appraiser, but took expert testimony about the methods of determining fair value, including net asset value and investment value. The trial court found the stock was worth $31 per share, which was determined by assigning 65% weight to the company’s net asset value and 35% weight to its investment value. The company appealed on several grounds, including the trial court’s refusal to consider its market share price.
The Superior Court agreed that it was an error to disregard the price at which the stock traded on the American Stock Exchange. The Court cited back to O’Connor Appeal, 452 Pa. 287, 304 A.2d 694 (1973), which required the courts in shareholder appraisal actions to consider actual market value as well as net asset value and investment value. The Court also held that the traditional “Delaware block” method of valuation (in which the court would only consider the three traditional methods of valuation, assigning a percentage weight to each) would yield to a broader consideration of generally accepted valuation techniques. (Business valuation was, at that time, a new and developing science.)
The Superior Court held that market value, while relevant, was not controlling. While it might be deemed extremely reliable in cases where there were many transactions providing extensive data, it might be less reliable in cases where the transactions were few and data scarse. Still, the Court held that market value should be totally disregarded only in cases where there was competent and substantial evidence to support the conclusion that the value at which the stock is trading is not at all reliable in gauging its intrinsic going concern value. For instance, where a high percentage of shares is held by an individual or small group, or thinly traded, the market value might be deemed unreliable.
The Superior Court in Glosser Bros. held that the trial court should not have totally disregarded the market trading price. By its ruling, the Superior Court attempted to pull away from the holding of O’Connor, in which the Supreme Court held: “[Shares of] a closely-held family corporation having unlisted stock and … no public market … [are] sold too infrequently for market value to play any part in [valuation].” In Glosser Bros., the Superior Court remanded to the trial court to consider market value among other valuation methods.
In Part II, which will be posted next week, we will discuss the other issue raised by Glosser Bros.: the expert’s ability to give opinions based upon hearsay evidence of the type ordinarily relied upon in the practice of business valuation.