IN THE COURT OF APPEALS OF IOWA
No. 14-1054
Filed May 20, 2015
TWC I, L.L.C, f/k/a THE WEITZ COMPANY I, INC. and TWC II, L.L.C., f/k/a
THE WEITZ COMPANY II, INC.,
Plaintiffs/Counterclaim-Defendants/Appellees/Cross-Appellants,
vs.
CRAIG DAMOS,
Defendant/Counterclaim-Plaintiff/Appellant/Cross-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Polk County, Richard G. Blane II,
Judge.
A minority shareholder appeals the district court’s valuation of his shares
of company stock. AFFIRMED.
Steven P. Wandro, Kara M. Simmons, and Shayla L. McCormally of
Wandro & Associates, P.C., and Glenn L. Norris of Hawkins & Norris, P.C., Des
Moines, for appellant/cross-appellee.
Robert M. Hogg and Patrick M. Roby of Elderkin & Pirnie, P.L.C., Cedar
Rapids, for appellees/cross-appellants.
Heard by Vogel, P.J., and Potterfield and Mullins, JJ.
2
VOGEL, P.J.
Craig Damos appeals the district court’s valuation of his shares of
corporate stock in TWC I, L.L.C, f/k/a The Weitz Company I, Inc. and TWC II,
L.L.C., f/k/a The Weitz Company II, Inc. (the Weitz companies). He claims the
court’s valuation was not supported by substantial evidence because the Weitz
companies did not offer a valuation that met the standards laid out in Iowa law.
He also claims the district court should have awarded him attorney fees and
costs. In addition to defending the district court’s decision, the Weitz companies
cross-appeal claiming the district court should have awarded attorney fees and
costs to them. Because we find substantial evidence to support the district
court’s valuation of the price of the shares of corporate stock, we affirm the
district court’s decision. We also find substantial evidence to support the district
court’s decision to deny both parties’ claims for attorney fees and costs.
I. Background Facts and Proceedings.
The Weitz companies were employee-owned construction companies
based in Des Moines. On December 13, 2012, the Weitz companies were sold
to OCI Construction Holding Limited. The sale was negotiated by FMI Capital
Advisors, Inc. Between 2000 and 2010 Damos was the chief financial officer and
later the chief executive officer and chairman of the Weitz companies. He left his
position in 2010 but retained his shares of the companies’ stock and was a
minority shareholder at the time of the sale.1 The Weitz shareholders voted to
approve of the sale to OCI, but Damos was one of two shareholders to vote
1
The parties stipulated at trial that the total number of shares of the Weitz companies at
the time of the sale was 294,121.5. Damos owned 9130 of those shares.
3
against the sale and the only shareholder to exercise his right to an appraisal
under Iowa Code sections 490.1301–.1331 (2013).
The Weitz companies provided a written appraisal notice to Damos that
included the Weitz companies’ estimate of the value of the stock at $75.01 per
share. This was also the price per share that resulted from the sale. The Weitz
companies paid Damos this valuation with interest. Damos disagreed with this
valuation and demanded payment of $215.73 per share plus interest, less the
amount he had already been paid.2 When the parties could not reach an
agreement, the Weitz companies initiated the lawsuit for the court to determine
the fair value of Damos’s shares under Iowa Code section 490.1330. As the
district court noted in its decision, there was no dispute that the case was
properly before the court or that the statutory requirements leading up to the
lawsuit had been satisfied. The only dispute was over the value of the stock,
which under the statute was to be valued “[i]mmediately before the effectuation of
the corporate action to which the shareholder objects”—in this case Damos
objected to the sale of the companies to OCI. Iowa Code § 490.1301(4)(a)(1).
That dispute could be divided into a disagreement over the value of the Weitz
companies’ accounts receivables and the value of the backlog.3
Both parties submitted expert reports and testimony on the value of the
companies, and both experts agreed on the methodology to use to value the
Weitz companies—net asset value method. In support of his valuation, Damos
2
Prior to trial, Damos adjusted his demand to $198.84 per share based on updated
financial information he received from the Weitz companies through discovery.
3
The backlog is the future work that the Weitz companies had contracted to do but
which had not yet been completed.
4
offered the opinion of Ronald Nielsen, a partner in the firm of CliftonLarsonAllen,
LLP.4 Nielsen valued the accounts receivables above what was reported in the
Weitz companies’ financial statements after identifying three major claims he
believed would have a higher anticipated collection than what was on the Weitz
companies’ financial statements. He also calculated the backlog amount at the
gross margin reducing the claim by only direct costs and not indirect overhead
costs. The price per share that Nielsen calculated was $198.84.
Weitz offered the expert opinion of Eric Engstrom of Engstrom Business
Valuation, LLC.5 Engstrom determined in his report that the value of the backlog
was significantly less than what Nielsen had calculated based on the indirect
overhead costs and the fact that a buyer of a company with a significant backlog
assumes the risk of obtaining a profit on this work the company is obligated to
do. Engstrom calculated the backlog was worth $1.5 million whereas Nielsen
had estimated the backlog at $16.5 million. As to the accounts receivable,
Engstrom adjusted the figure based on anticipated lower collection results as
reported by two reports created in anticipation of the OCI sale.6 Nielsen had
estimated the accounts receivables at over $42 million, whereas Engstrom
4
Nielsen also holds the following certifications: certified public accountant (CPA),
accredited in business valuation (ABV), certified valuation analyst (CVA), certified fraud
examiner (CFE), accredited senior appraiser (ASA), and certified in financial forensics
(CFF).
5
Engstrom is a chartered financial analyst (CFA), a certified public accountant (CPA),
and accredited in business valuation (ABV).
6
Those two reports included a report from OCI’s attorney, Seyfarth Shaw, estimating the
liquidation value of the accounts receivables to be $18,223,798. In response to this
report, the Weitz companies asked their general counsel, David Strutt, to report his
evaluation of the accounts receivables. Strutt reported to the Weitz companies that the
likely recovery would be $35,765,000 and the worst case scenario would result in a
recovery of $16,455,000.
5
estimated the value was a little over $18 million. The total price per share that
Engstrom calculated was $70.81.
The district court, after a three-day bench trial, issued a thorough and well-
reasoned thirty-two page decision, accepting Engstrom’s valuation of the shares
at $70.81. As the Weitz companies had already paid Damos $75.01 per share,
Damos was not entitled to any further payment, and under the law, the Weitz
companies were not entitled to recover for the overpayment. The court also
denied both parties’ requests for attorney fees and costs as it concluded neither
party failed to comply with Iowa Code chapter 490, or acted arbitrarily,
vexatiously, or not in good faith.
From this ruling, both parties appeal.
II. Scope and Standard of Review.
Because this case was tried to the district court at law, our review is for
correction of errors at law. Nw. Inv. Corp. v. Wallace, 741 N.W.2d 782, 785
(Iowa 2007). “The district court’s findings of fact are binding on us if supported
by substantial evidence.” Id. We view the evidence in the light most favorable to
the district court’s judgment. Miller v. Rohling, 720 N.W.2d 562, 567 (Iowa 2006).
Under this standard of review, “[w]e neither weigh the evidence nor the credibility
of witnesses.” Eventide Lutheran Home for the Aged v. Smithson Electric & Gen.
Constr., Inc., 445 N.W.2d 789, 792 (Iowa 1989).
III. Substantial Evidence-Corporate Stock Valuation.
Under Iowa Code section 490.1302(1)(c), a shareholder is entitled to
appraisal rights and to obtain the fair value of the shareholder’s shares if the
corporation disposes of its assets and the shareholder is entitled to vote on the
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disposition. The shareholder must give the corporation notice of the
shareholder’s intent to demand payment if the corporate action is taken. See
Iowa Code § 490.1321. If the corporation takes the action, the corporation must
provide to the shareholder an appraisal notice and form estimating the fair value
of the shares. See id. § 490.1322. The shareholder can exercise the appraisal
right if the shareholder returns the form and deposits the shares with the
corporation. See id. § 490.1323. The corporation must then pay the shareholder
the fair value it determined for those shares together with interest. See id.
§ 490.1324. If the shareholder is dissatisfied with the price, the shareholder can
notify the corporation of the shareholder’s estimate as to the fair value and
demand payment, less any payment already made. See id. § 490.1326. The
corporation then can seek court action to determine the value of the shares at
issue by filing suit within sixty days of the demand made by the shareholder. See
id. § 490.1330. The parties agree that all the statutory requirements were met in
order to seek the court’s appraisal of Damos’s stock in the Weitz companies.
The fair value of the stock in question is determined “[i]mmediately before
the effectuation of the corporate action to which the shareholder objects.” Id.
§ 490.1301(4)(a)(1). The fair value is to be determined “[u]sing customary and
current valuation concepts and techniques generally employed for similar
businesses in the context of the transaction requiring an appraisal.” Id.
§ 490.1301(4)(a)(2). “There is no predominant, perfect formula for arriving at fair
value.” Nw. Inv., 741 N.W.2d at 786. The facts of the case control what
methodology should be used. Id. Some of the factors that have been identified
by our courts as helpful to the fair-value analysis include:
7
the rate of dividends paid, the security afforded that dividends will
be regularly paid, the possibility that dividends will be increased or
diminished, the size of the accumulated surplus applicable to the
payment of dividends, the record of the corporation, its prospects
for the future, the selling price of stocks of like character, the value
of its assets, book values, market conditions, [and] the reputation of
the corporation.
Sieg Co. v. Kelly, 568 N.W.2d 794, 798 (Iowa 1997). But “the court should
consider any relevant factor not inconsistent with the statutory definition of ‘fair
value.’” Id.In asserting on appeal that the district court’s decision is not supported by
substantial evidence, Damos claims the district court erred when it “rel[ied]
almost exclusively on the transaction price, misunderstood purchase price
accounting, and did not rely on the highest level of corroborative evidence
available to the court—[the] Weitz [companies’] own financial statements.” First,
there is no indication in the record that Engstrom did not rely on the Weitz
companies’ own financial statements.
With respect to Damos’s claim the court erred in considering the price OCI
paid to purchase the Weitz companies, our supreme court has stated the
circumstances of a transaction are relevant evidence in seeking to establish the
value of a corporation. Ely, Inc. v. Wiley, 587 N.W.2d 465, 469 (Iowa 1998). We
note the court did not exclusively rely on the purchase price but instead
considered both experts’ opinions in light of the facts and circumstances the
companies were experiencing at that time. The Weitz companies were
experiencing the effects of the economic downturn, having laid off one-half of the
employees and incurred obligations to pay those laid off the value of their shares,
an obligation the companies could not afford to perform at that time. The
8
companies had difficulties retaining their bonding companies due to the decrease
in working capital. The court noted the companies had stopped paying dividends
and were unlikely to make dividend payments in the foreseeable future. The
Weitz companies also experienced a significant operating loss in 2011. After
noting the background of the companies’ financial condition and the
circumstances surrounding the sale, the court concluded the transaction price
was a relevant factor. We find no error in the court’s consideration of the price
from the OCI sale.
With respect to Damos’s claim the court misunderstood purchase price
accounting, Damos asserts the court should not have relied on Engstrom’s
opinions because Engstrom did not conduct a full appraisal under chapter 490
but instead relied on the work he previously performed for the Weitz companies,
before and after the sale, to criticize Nielsen’s report. Damos claims Engstrom’s
opinions are contrary to Iowa law because the opinions relied on the work he
performed after the sale to OCI to create an “opening balance sheet” for the new
company based on the sale price and then worked backwards to arrive at his
figures. Damos maintains this was in error because the fair value analysis must
be based on presale values.
Both Engstrom and Nielsen agreed as to the proper methodology to use in
appraising the companies prior to the transaction—net asset value method. The
only real fighting issues between the two were the values assigned to various
assets of the companies. Thus, we conclude it was immaterial that Engstrom did
not create an entirely new appraisal out of whole cloth, but instead, he
9
highlighted the areas of disagreement he had with Nielsen’s valuation based on
his own knowledge and investigation.
While Engstrom did provide services to the new company after the sale,
his opinions as to the value of the Weitz companies were generated from
information and reports generated before the sale. Engstrom relied on the
reports from the Weitz companies’ general counsel and from OCI’s attorneys in
valuing the accounts receivables significantly less than Nielsen had valued them
in his report. Both the Weitz companies’ report and OCI’s report were completed
months before the transaction was completed. While Engstrom’s opinion as to
the value of the backlog was prepared after the transaction during his work to
prepare the opening balance sheet for the new company, his opinion that the
backlog had little to no value to the Weitz companies was supported by other
evidence and opinions generated before the sale, including the officers of the
Weitz companies, an evaluation done by FMI, and the independent evaluation
done on behalf of the Weitz companies, which gave a recommendation to the
companies as to fairness of the sale.
Next, Damos asserts the use of the sale figure was not proper because
the sale was not an arms-length transaction. He claims it was more akin to a
forced sale because the Weitz companies did not have enough reserves to pay
outstanding debt, only one buyer was courted, and the companies felt compelled
to sell.
We first note that this contention is at odds with Damos’s assertion that
the value of the Weitz companies was higher because they were not a sinking
ship but were “weathering the storm” of the economic downturn. Either the
10
companies were compelled to sell to OCI because of the dire financial situation,
or the transaction was an arms-length transaction completed between a willing
buyer and a willing seller. Damos cannot have it both ways. Upon our review of
the record, we conclude substantial evidence supports the district court’s
conclusion that this was “not a typical sale of a closely held corporation and more
closely mirrored a true arms-length transaction.”
The Weitz companies were approached by OCI, through the broker FMI,
about the possibility of a sale. FMI and OCI did considerable due diligence in
determining the sale price for the company. FMI determined that the companies
were generally unsaleable and that the OCI interest was unique. In addition, the
Weitz companies hired an independent evaluator to opine as to the fairness of
the proposed transaction. That evaluator determined the sale was fair to the
Weitz companies’ shareholders.
The companies’ independent board members unanimously approved the
transaction, and the full board did the same, recommending the sale to the
shareholders. No individual shareholder owned more than 15% of Weitz I, and
no individual shareholder owned more than 10% of Weitz II. The executive
officers and directors of Weitz I as a group owned less than 29% of the company,
and the executive officers and directors of Weitz II as a group owned less than
5% of that company. While some of the employees and executives continued in
their position with the new company, none of the officers with the Weitz
companies executed any employment agreements before the transaction or
received additional consideration from OCI as a result of the transaction. We
agree substantial evidence supports the district court’s conclusion the transaction
11
price was relevant “where shareholders have approved an arm’s-length
transaction by the requisite statutory approval, the shares are widely dispersed,
and appropriate corporate governance processes were followed to address any
risk of self-dealing.”
Finally, Damos claims that Nielsen gave the only reliable expert opinion as
to the value of the shares immediately before the sale, and the district court was
wrong not to set the price at $198.84 in accordance with Nielsen’s opinion.
Ultimately, it is the district court, as the fact-finder, who must evaluate the
evidence and weigh the expert opinions. See Ely, Inc., 587 N.W.2d at 469-70
(affirming the district court’s decision to accord greater weight to one expert over
another). In performing that function the district court concluded:
The Court determines the Engstrom Report is more credible than
the Nielsen Reports.
In addition to making this determination based on the
Engstrom Report’s correction of clear errors in the Nielsen Reports,
the Court finds the Nielsen Reports to not be credible for additional
reasons. The record supports a finding that Damos initially
determined the fair value that the Nielsen Reports adopted rather
than the other way around. This is confirmed in a March 4, 2013
letter from Mr. Nielsen to Damos and his counsel so stating, and
further confirmed in Damos’s answer to Interrogatory No. 4 so
stating. Mr. Nielsen’s use of Damos’s valuation as a starting and
stopping point raise concerns regarding the independence of his
opinion.
In addition to a lack of independence, the Nielsen Reports
also do not identify or discuss the impact of the Buy-Sells on the
value of Damos’s shares, although such reporting is clearly
required under all applicable standards for business value
reporting. It is also clear to the Court that although the Nielsen
Reports state in multiple locations that his investigation included
communications and discussions with current Weitz management
and with its accountants and attorneys, the record does not support
such a finding. The record is clear that all materials reviewed by
Mr. Nielsen in support of his value opinion were provided to him by
Damos from materials Damos had received from Weitz in
discovery, and no additional facts were identified as coming from
12
current management. The Nielsen Reports also do not disclose or
discuss the significant assumptions he made to determine
increased value of the Weitz Claims Receivables and to determine
backlog value.
On appeal, “[w]e neither weigh the evidence nor the credibility of witnesses.”
Eventide Lutheran Home, 445 N.W.2d at 792. Based on its assessment that
Engstrom’s report was more credible, the court set the price for Damos’s shares
at $70.81. We affirm the court’s decision as we find substantial evidence to
support it.
IV. Attorney Fees and Costs.
Next, both parties appeal the district court’s denial of their respective
requests for attorney fees and costs pursuant to Iowa Code section 490.1331.
Damos asserts the Weitz companies acted contrary to Iowa law and paid an
arbitrary amount—$75.01—for his shares, entitling him to attorney fees and
costs. Conversely, the Weitz companies claim Damos showed a lack of good
faith in preparing the original appraisal calculation for his expert and testifying
contrary to all evidence as to the value of the Weitz companies. Because the
Weitz companies assert Damos should have known better based on his
knowledge, sophistication, and experience, the Weitz companies believe the
court should have awarded attorney fees and costs.
Iowa Code section 490.1331 provides, in part:
1. The court in an appraisal proceeding commenced under
section 490.1330 shall determine all costs of the proceeding,
including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against
the corporation, except that the court may assess costs against all
or some of the shareholders demanding appraisal, in amounts the
court finds equitable, to the extent the court finds such
13
shareholders acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this division.
2. The court in an appraisal proceeding may also assess the
fees and expenses of counsel and experts for the respective
parties, in amounts the court finds equitable, for either of the
following:
a. Against the corporation and in favor of any or all
shareholders demanding appraisal if the court finds the corporation
did not substantially comply with the requirements of section
490.1320, 490.1322, 490.1324, or 490.1325.
b. Against either the corporation or a shareholder
demanding appraisal, in favor of any other party, if the court finds
that the party against whom the fees and expenses are assessed
acted arbitrarily, vexatiously, or not in good faith with respect to the
rights provided by this chapter.[7]
The award of attorney fees and costs under this section is a two-step process.
Sec. State Bank v. Ziegeldorf, 554 N.W.2d 884, 893 (Iowa 1996). “As a
prerequisite for such an award, the trial court must make a factual finding that the
corporation [or shareholder] did not substantially comply with chapter 490 or
acted arbitrarily, vexatiously, or not in good faith.” Id. We review the district
court’s factual findings on this issue for substantial evidence. Id. If the court
finds facts present to satisfy the first step, it then has discretion to award fees
and costs, and we review the court’s award of fees and costs, or its failure to
award fees and costs, at this second step for abuse of discretion. Id.The district court denied the claim of both parties based on the first step—
that neither party failed to comply with chapter 490 or acted arbitrarily,
vexatiously, or not in good faith. In denying Damos’s claim for fees and costs,
the court stated:
7
We note this statute was amended in 2013, and the amendments became effective
January 1, 2014. 2013 Iowa Acts ch. 31, §§ 65, 82. However, we have used the prior
version of the statute, which was applicable when this action was filed by the Weitz
companies in April 2013. We offer no opinion as to the effect of the recent amendments
to this section.
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Damos admits that Weitz complied with all requirements of
Iowa Code chapter 490 in addressing their dissenter’s rights
process and that is confirmed by the record. Further, Weitz
implemented the transaction under processes which are the model
of good corporate governance, including retaining a highly qualified
and competent broker and fair value opinion provider, actively
engaged its Boards which contain highly qualified members
including experienced and highly competent independent members,
and full disclosure [of] materials to all interested participants.
Weitz’s offer to Damos to treat him the same as all other
shareholders, using a price well supported by competent and
qualified experts and further providing immediate payment in full,
notwithstanding the agreed contract terms which required a lower
amount and allowed for deferred payments, exemplifies good faith.
The Court finds no basis for determining that Plaintiffs have acted
arbitrarily, vexatiously, or not in good faith.
With respect to the Weitz companies’ claim against Damos, the court stated:
Weitz admits that Damos complied with all requirements of
Iowa Code chapter 490 in addressing his dissenter’s rights process
and that is confirmed by the record. Damos initially claimed two
dissenter elections, which is not supported by law, and which
required Weitz to incur added legal expense to respond. However,
the Court finds this to be inadvertent. Further, as a CPA
specifically with valuation experience, and as Weitz’s former CFO
and then CEO and Chairman with intimate knowledge of Weitz,
Damos had the experience, sophistication, and knowledge to
conclude that his determinations of fair value were reasoned with
respect to facts and law. Valuation of a corporation the size of
Weitz, with its many variables, is subject to opinions of wide
variance. Based upon a review of all of the evidence, the Court
concludes that Damos’s actions were not arbitrary, vexatious, or
not in good faith as required by the statute to award attorneys’ fees
and costs in some amount.
Based on our review of the record of the case, the court’s factual findings that
neither party acted arbitrarily, vexatiously, or not in good faith, and that both
parties complied with the applicable code sections in chapter 490, are supported
by substantial evidence. We therefore affirm the court’s denial of both parties’
claims for attorney fees and costs.
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V. Conclusion.
We conclude substantial evidence supports the court’s valuation of
Damos’s shares and the court’s denial of both parties’ requests for attorney fees
and costs. We therefore affirm the district court’s ruling in its entirety.
Costs on appeal are assessed one-half to each party.
AFFIRMED.