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Holiday Medical Center, Inc. v. Weisman

A-5198-08T2 (N.J. Super. App. Div. 2010) (Unpublished)

CORPORATIONS; SHAREHOLDERS; VALUATION — There is no legal precedent requiring a court to analyze the tax consequences to each and every shareholder when determining whether the shareholders have each received fair value for their interest upon dissolution.

A dissenting shareholder filed suit seeking a determination of the fair value of her 5% interest in a nursing home. Due to significant operational losses, the nursing home’s directors elected to sell the property to a nonprofit private school for $8,000,000 while its asset still had some value. After paying off the mortgage and making a charitable donation of approximately $2,900,000 to the school, the net available to the nursing home’s shareholders was approximately $2,000,000. Absent her dissent, the shareholder was to receive approximately $100,000 from the sale of her interest.

The shareholder dissented from the sale and demanded fair value for her shares. The lower court appointed an appraiser to conduct an individual appraisal of the nursing home. The appraiser issued a report with alternative valuations, one valuing the property as “a going concern” and the other using its liquidation value. The appraiser’s “going concern” valuation was $5,540,000 and the liquidation value was $7,000,000. The shareholder sought to have the liquidation value used. The lower court determined that the “going concern” was the proper method of valuation. The shareholder appealed.

The Appellate Division concluded that while the lower court did not err in using a “going concern” method of valuation, the lower court had not actually accepted the appraiser’s valuation. Instead, the lower court concluded that the proper value was the property’s market value negotiated in an arms-length transaction. The lower court used the going concern value only to corroborate the contract sales price. The Appellate Division remanded the matter to the lower court to explain why it used the contract sales price instead of the appraiser’s going concern value and to determine whether the corporation’s election to give a charitable contribution to the private school purchaser depressed the value of the shareholder’s interest.

On remand, the lower court affirmed its prior determination and explained that there was no evidence of bad faith or self dealing and that the corporation’s determination to sell at the contract price was reasonable. It also rejected the shareholder’s claim that the charitable contribution depressed the value or her shares. The shareholder appealed again, but the Appellate Division affirmed, rejecting the shareholder’s claim that her share should have been valued based on the $8,000,000 sales price without factoring in the charitable contribution. The Court noted that the sales price was structured to take into account the mortgage payoff and charitable contribution, and that it would have been structured differently had there been no charitable contribution to the buyer. The Court also rejected the shareholder’s claim that the value of her shares was depressed because she was eligible for a smaller tax deduction than were the majority shareholders. She noted that, based on her circumstances, she would not receive the same tax benefits from the charitable contribution as the other shareholders. The Court, however, agreed with the lower court in rejecting that argument. It agreed that there is no legal precedent requiring the court to analyze the tax consequences to each and every shareholder in determining whether the shareholders receive fair value. It noted that while the shareholder did not receive the same tax benefit as some other shareholders, she still was able to offset a 15% capital gains tax.

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