Case Law—State: Case Law—State: American Ethanol, Inc. v. Cordillera Fund, LP

Case Law—State: American Ethanol, Inc. v. Cordillera Fund, LP

In American Ethanol, Inc. v. Cordillera Fund, LP, the Supreme Court of Nevada is required to weigh in on fair market value. A lower court had judged that stockholders were fairly paid some $1.75M (about $3 per share) for American Ethanol at the time of the merger. American Ethanol appealed, claiming it was worth more. Part of its argument was that its appraiser—an unaccredited one—couldn’t be expected to perform sophisticated calculations, such as a discount for lack of marketability. Find out what the Nevada Supreme Court determines and why!

The Second Judicial District Court, Washoe County, Nevada, entered a judgment in favor of respondent stockholder and against appellant corporations, jointly and severally, determining that a preponderance of the evidence established that the fair value of the stockholder’s stocks at the time of the corporate merger was $1,750,002, or $3 per share.

The corporations appealed. The corporations argued that the district court abused its discretion in determining the fair value of the shares because the stockholder failed to meet its burden of proof.

“…appraiser they hired could not perform such a complex appraisal…”

The Supreme Court noted that Nevada law made the court the final arbiter of fair value. In a stockholder’s right-to-dissent appraisal action, both the dissenting stockholder and the corporation had the burden of proving their respective valuation conclusions by a preponderance of the evidence in the district court.

Final responsibility for determining fair value, however, was with the court. The corporations did not demonstrate that the district court abused its discretion in calculating the fair value of the stockholder’s shares.

The district court considered several factors reflecting value, including the price that the stockholder paid for the shares of stock in 2006 and the price that the corporations indicated on an SEC document as the offering price of the series B preferred stock on the merger date— all of which were $3 per share.

It should be noted that neither parties obtained an accredited appraisal.

During oral argument, counsel for American Ethanol maintained that the appraiser they hired could not perform such a complex appraisal and take into account such complex items such as discounts for lack of control and marketability.

American Ethanol further argued that the trial court erred by adopting the merger price as statutory fair value because it failed to consider such factors as the pre- and post- merger enterprise value of the company stock, including illiquidity.

The Nevada Supreme Court rejected these arguments finding (in a case of first impression) that in a dissenting shareholder case, both sides have the burden of proving their respective valuation positions by a preponderance of the evidence with the trial court making the final, independent determination. The court adopted this approach from Delaware law and affirmed the lower court’s finding that the $3.00 offering price represented fair value.