Buckley v. Carlock

This Tennessee decision was a case of shareholder oppression that had been appealed. The disposition of the appellate court in this matter was to affirm the decisions of the Chancery Court. The primary issue in this matter was whether the Chancery Court properly valued a shareholder’s minority interest in a closely held corporation. 

The Chancery Court, after determining that there was shareholder oppression by the majority, did not abuse its discretion in holding a separate phase of the trial for the parties to present evidence as to the value of the minority shareholder’s interest. And it did not abuse its discretion in using a method generally accepted in the financial community to value the interest. 

A second issue, not covered in this digest, dealt with the denial of prejudgment interest by the Chancery Court. The appellate court affirmed both issues.

Opinion facts.

Thomas Buckley (the plaintiff) owned 25% of TLC of Franklin Inc., a car dealership in Tennessee. He also served as the GM. Grover Carlock acquired a 75% interest from the other shareholders in 2014 for more than $10 million. Buckley sold 5% of the company to Luke Bryan for $700,000, leaving three shareholders. Over time, the relationship between Buckley and Carlock deteriorated. Carlock entered into transactions that benefited him but not Buckley, such as increasing management fees to a separate company Carlock owned.

Buckley sued Carlock and Carlock Management Co. (the defendants), seeking to have the company dissolved on the basis of shareholder oppression. After a bench trial, the Chancery Court found that Carlock’s actions were “oppressive,” but that dissolution would have been too extreme, and redemption was a better solution. Buckley’s opinion of the value of his shares was found unreliable, and the Chancery Court conducted another hearing in which it heard evidence from valuation experts.

Adam Lawyer testimony.

Adam Lawyer testified for Buckley. The lawyer selected a market approach and “employed three methodologies.” “The first two were based on the ‘current industry market indicator’ or ‘blue-sky’ method. Mr. Lawyer described the method as using a blue-sky multiple to account for all intangible value of the dealership, including goodwill and, more importantly, franchise value.” In the first method, Lawyer determined “normalized earnings” at the midpoint of 5% of data from other high-end franchisees. He multiplied the normalized earnings by a blue-sky multiple of 8, which he determined from his experience in dealership transactions and auto dealership publications. To this amount, Lawyer added TLC’s adjusted net assets. 

The second method was similar to the first, but, instead of using normalized earnings, he used “revenues” (Editor’s note: “earnings”?) from an “investment presentation” management prepared. The third methodology was based on prior TLC stock transactions. “To arrive at a value of Mr. Buckley’s shares, Mr. Lawyer tabulated a weighted average from each methodology. He opined that the value of Mr. Buckley’s shares was $3.3 million.”

Scott Womack testimony.

Scott Womack testified for Carlock. Womack used a normalization factor of 1.5%, saying that was more in line with historical performance. He also used a blue-sky multiple of 7.5 to determine the intangible value of TLC but admitted that the 8.0 multiple Lawyer used was also in a reasonable range. Womack did not add the net assets to his value, saying doing so would be a “double counting.”

Chancery Court valuation.

The Chancery Court accepted Lawyer’s blue-sky “approach” with normalized earnings. However, the Chancery Court did not accept either expert’s normalization factor and utilized its own determination of 2.8% and 2.9% for 2015 and 2016. Additionally, the Chancery Court added back only half of the adjusted net assets. “[T]he court arrived at $1,745,489.50 for Mr. Buckley’s 20% share of TLC.”

Appellate court.

The Chancery Court did not abuse its discretion in holding a second phase to “fill the hole.” In forcing the redemption of Buckley’s shares, he was afforded the same remedy as a dissenting shareholder, i.e., the fair value of the shareholder’s shares. Determining fair value was generally left to the discretion of the courts. A court decision need only be in the range of acceptable dispositions. “Fair value is ‘the shareholder’s proportionate interest in the business valued as a going concern.’” (Raley v. Brinkman). It may be proven by any techniques or methods that are acceptable in the financial community. Fair value requires that the shareholder be fairly compensated, “which may or may not equate with the market’s judgment about the stock’s value.” (Athlon Sports). 

The Chancery Court accepted a valuation methodology from Lawyer acceptable in the financial community. Critically, the method was based on fair value and not fair market value. Buckley claimed that the Chancery Court made three errors in its valuation of his shares.

1. The normalization factors the Chancery Court used were arbitrary and not supported by the evidence—The appellate court noted that the Chancery Court derived its normalization factors from data from the National Auto Dealers Association. Taking that data and testimony from Lawyer that ultra-high-end dealerships have higher return rates, the Chancery Court arrived at its conclusion. Buckley faulted the Chancery Court for disregarding the testimony of a Lawyer as to normalization rates. The appellate court disagreed, noting “[t]he trial court gave credit to a data compilation that both experts testified was authoritative and reliable.”

1. The Chancery Court diluted the effect of the tangible assets by accounting for only half of them—The appellate court noted both experts agreed that, under the blue-sky methodology, adjusted net assets should be added back to the equation. However, Womack testified that, under his income “approach,” adding the assets back results in double counting. Noting that valuation “is as much art as science,” the appellate court pointed out that the Chancery Court’s role was to determine an equitable value resolving the parties’ legitimate but competing expert opinions. Under the abuse of discretion standard, the appellate court will not substitute its judgment for that of the Chancery Court. Splitting the difference was an acceptable and equitable disposition.

1. Buckley argued that the Chancery Court ignored prior sales in determining the value of his interest—The Chancery Court did not find Lawyer’s testimony credible. The Chancery Court was entitled to disregard this evidence.

Conclusion.

“Ultimately, the trial court used a valuation method that is generally acceptable in the financial community to equitably calculate Mr. Buckley’s interest in TLC. The court did not abuse its discretion.”