Ryan Trust v. Ryan

 In a bitter buyout dispute involving a thriving private family business and featuring two veteran appraisers, the Nebraska Supreme Court recently affirmed the district court’s decision to unreservedly credit the valuation testimony of the expert for the late majority shareholder. In contrast, the district court found the company’s expert’s valuations under various methods showed a “downward bias” that made the expert’s value conclusion unreliable. 

 Oppression Claim

Streck Inc. was a worldwide industry leader in developing and manufacturing cell stabilization technology in hematology, immunology, and molecular diagnostics. Sales have been strong and increasing every year since its creation, and it has had no product recalls in the past 25 years. The company had long-lasting relationships with large customers and a valuable portfolio of intellectual property. Its financial performance surged in recent years, and it expected more growth in future years. 

Streck was founded by Dr. Wayne Ryan, who, at the relevant time, owned over 52% of the company’s stock by way of a trust (RRT). However, one of his daughters came to own two-thirds of the company’s voting shares, enabling her to appoint a majority of the board of directors. In September 2013, she replaced her father as CEO. She encouraged her father to retire. Dr. Ryan did not object to her becoming CEO as long as the company was sold. In 2014, the CEO took steps to sell the company.  

According to a trial industry expert for RRT, the sales process was “flawed and failed.”Despite the company’s ongoing solid performance and a growing healthcare life sciences market, bids solicited by an investment banker on behalf of Streck were relatively low. The expert found that growth projections were too conservative and not adequately explained to prospective investors buyers. The industry expert said the investment banker lacked experience in the appropriate market. Further, the company decided to exclude the highest bidder in the first round. 

Dr. Ryan complained he was not listened to and could not approve the sale. The board and his daughter, as CEO, abandoned the process.RRT, representing Dr. Ryan (who died before trial), sued the daughter and Streck, alleging oppression and breach of fiduciary duty and asking for judicial dissolution of the company. Ultimately, Streck elected to buy RRT’s shares under the applicable statute, which triggered a fair value determined by the district court.

‘Dysfunctional’ Sales Process

Both sides’ experts were highly experienced appraisers and used the discounted cash flow (DCF) approach in combination with the guideline publicly traded company (GPTC) and guideline merger and acquisition (GMA) methods to determine the fair value of Dr. Ryan’s shares. In adopting RRT’s 74-page proposed findings verbatim, the district court wholly adopted the testimony of RRT’s industry and valuation experts. Regarding the DCF, the court said the appraiser’s revenue and income projections aligned with the company’s projections and prospects for growth; his growth rate was reasonable, as were the selected company-size risk premium and company-specific risk premiums. Further, the expert, who applied a 14% S corp premium, “credibly and convincingly testified” that no rational company would convert from an S-corp to a C-corp before a sale. In contrast, the court said that the company’s expert gave “misleading and not credible” explanations for his projections and “double-counted” the same risks to justify his predictions and company-specific risk premium. It noted this expert arrived at the same 14% S corp premium but decided to half it accounts for the company’s risk of becoming a C corp in the future. The district court found this adjustment was“arbitrary” and said it reflected the expert’s “downward bias.”

The company appealed and based on the parties’ request for bypass, and the case went in front of the state Supreme Court, which affirmed. The high court said its de novo review of the record concluded that the district court’s valuation was reasonable and based on fact and principle.