ShopRite, Inc. v. Gardiner

The Court of Appeals was asked to review the trial court’s determinations of fair value for the shares of stock of a withdrawing shareholder. Shawne Gardiner was a withdrawing shareholder in ShopRite Inc. (3.8% interest) and Tobacco Plus Inc. (3.95% interest). Gardiner sent a formal notice of withdrawal under the Louisiana statute, claiming shareholder oppression. The parties disagreed on the fair value of the companies. A valuation trial was held in September 2020. The trial court ruled the fair value of Gardiner’s interest in ShopRite was $1,250,338, and the fair value of Gardiner’s interest in Tobacco Plus was $607,810.

Gardiner appealed these judgments and asserted the following assignments of error:

1. The trial court erred in employing a discount for tax effecting;
2. The trial court erred or abused its discretion in finding that a sale of the companies was inevitable;
3. The trial court erred or abused its discretion in applying a discount for the collectability of related party accounts receivable; and
4. The trial court erred as a matter of law by failing to follow the Kolwe case and award interest from the date of judgment until paid.

In the Kolwe case, this appellate court determined that “the term ‘fair value’ in Louisiana’s shareholder oppression statute means the withdrawing shareholder’s proportionate interest in the corporation valued as a going concern. Thus, to a certain ‘fair value,’ the trial court must first determine the corporation’s value in its entirety and then allocate the withdrawing shareholder his proportionate ownership interest of that value without applying any discounts at the shareholder level.” “Fair value” does not mean“fair market value.” Thus, fair value values the company as a whole and ascribes to each share its pro rata share of the overall enterprise value.

ShopRiteInc. (3.8% ownership interest).

The plaintiffs’ valuation analyst utilized the adjusted net asset method. Both parties agreed this was the appropriate method but disagreed about certain adjustments. The first issue is whether trapped-in capital gains tax should be added as a liability. Second, whether the receivables of one of the shareholders and an affiliated company of his own should be reduced because of collectability.

Trapped-in capital gains discount. The plaintiffs’ expert testified that ShopRite, a C-corporation, owned substantial real estate throughout Louisiana that had appreciated and depreciated. An appraiser determined the current value of the properties at “market value,” which meant they would be sold. He further testified that there was no intention of selling any of the properties, but “it is common and accepted to recognize the trapped-in capital gains taxes as a liability on the balance sheet.” The capital gain amount was estimated to be $26,874,922 with estimated tax using a blended federal-state rate of 26% at $6,987,480. The appellate court noted that this was an entity-level discount.

Gardiner’s expert testified that the discount in this instance was improper since ShopRite had no plans to sell any of its properties, meaning that any capital gains taxes were speculative and uncertain. There was no proof that these capital gains taxes would ever be paid. The trial court sided with the plaintiff’s expert and included the discount because “a sale of assets of both companies [(ShopRite and Tobacco Plus)] is inevitable, not hypothetical.”

The appellate court noted that the Kolwe definition of fair value was not a universal bar for a trapped-in capital gains discount, but there must be a factual basis. However, there was no real basis in the record to support the trial court’s decision to include the discount. A sale of the assets is not inevitable but rather hypothetical.“ The value of the community interests‘ should not and cannot be predicated on tax consequences of some future uncertain event.’” If the tax were based on an unknown future event, then the future tax consequences should not be considered in determining the value. The trial court thus manifestly erred in allowing such a discount.

Downward adjustments to company receivables. The plaintiffs’ expert reduced the value of the related-party receivable, citing issues with documentation, the long-term nature of the receivable, and the lack of interest charged or paid. Gardiner’s expert opined that these adjustments were inappropriate. The expert disagreed with the present value as sumptions the plaintiff’s expert used, casting the receivables as continuing with no interest. The plaintiffs’ expert admitted that his calculation had nothing to do with collectability. There was no evidence of uncollectability. The appellate court disallowed the adjustment.

Tobacco Plus Inc. (3.95% ownership interest).

Tobacco Plus was also a C corporation. As in the ShopRite instance, the trial court erred in applying a trapped-in capital gains discount to related-party receivables.

Court of Appeals Decree.

For the above reasons, the trial court’s judgment was amended to reflect the fair value of Gardiner’s interests in Rite Shop and Tobacco Plus and allow legal interest from Nov. 10, 2020, until paid. Affirmed as amended.