In 2017, British American Tobacco (BAT) bought a North Carolina-based tobacco company, Reynolds American Inc., for $ 49 billion. The deal allowed BAT to acquire the 57.8% of Reynolds it did not already own and brought together many leading cigarette brands under one corporate roof. BAT remains one of the largest tobacco companies in the world.
While Reynolds shareholders strongly supported the transaction, including 99% of the voting shares not already owned by BAT, a group of dissident shareholders have requested a forensic assessment of the fair value of their shares. In valuation contexts, North Carolina follows the Delaware standard that “both parties bear the burden of proving their respective valuation positions”. See the leveraged brigade cap. Structures Fund Ltd. vs. Stillwater Mining Co., 240 A.3d 3, 17 (Del. 2020).
Following a trial, briefing, and post-trial oral argument, the Business Court concluded (2020 NCBC 35) in a comprehensive 189-page ruling that the “fair value” of Reynolds’ shares does not. did not exceed the “transaction price” which had resulted from the negotiations. between BAT and members of the Reynolds Board of Directors not affiliated with BAT. We have written about pre-trial disputes over whether the dissenters had appropriately “perfected” their claims here.
On appeal, the North Carolina Supreme Court confirmed that the valuation determination, Reynolds Am. Inc. v. Third Motion Actions Master Fund Ltd, 2021-NCSC-162 (December 17, 2021). This was the Court’s first review of a Business Court’s “fair value” determination.
The dissenting shareholders argued on appeal that Bledsoe J. accorded undue deference to the negotiated “sale price”, even though it was an unverified insider dealing. In their view, this inappropriate deference ran counter to the obligation of the commercial court (NCGS § 55-13-01 (5)) to use:
“Usual and current valuation concepts and techniques generally employed for similar activities in the context of the transaction requiring valuation[.]”
Because the General Assembly had not “prescribed[d] any specific methodology that the court must use in an assessment proceeding ”, the Supreme Court used an“ abuse of discretion ”standard of review when:
“It is primarily for the business court to determine which valuation concepts and techniques should be used to determine the fair value of the shares of a dissident shareholder and the weight to be given to the results of any particular concept or technique it chooses. “
2021-NCSC-162, § 8.
Writing for a unanimous court, Justice Earls found that “a close reading of the full commercial court judgment” showed that he was using a lot of valuation data that included “Reynolds'” competitive positioning and relationship with BAT ” , regulatory dynamics of the industry, analyzes of stock prices and ‘valuations produced during the transaction process. Identifier. 13-14. The opinion rejected the claim that the commercial court had found “fair value” based on the “deal price”, but instead felt that he “used a range of acceptable valuation concepts and techniques to arrive at the conclusion that the trade price reflected fair value.” Identifier. 14.
Discounted Cash Flow Analysis (DCF)
The parties differed sharply over their reliance on a DCF analysis, put forward by the dissenters, that determined a stock value for Reynolds based on projections of the company’s performance over time. The Supreme Court, again in accordance with Delaware law, upheld the discretion of the business court to dismiss dissenters’ DCF when it found the contributions to the analysis unreliable. See Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd, 177 A.3d 1, 37 (Del. 2017). The central conflict was between the rate of growth and the timeframe on which the analyzes of the dissidents’ expert and those of the financial advisers were based. The dissident DCF focused on ten-year growth protections, while business advisers’ projections considered “a long-term view of the outlook for society and industry rather than the specifics of a few years to a year. shorter term ”. 2021-NCSC-162, 25. Analysis windows are essential for tobacco industry actions given the conflicting goals of health advocates and manufacturers, and the ever-ongoing narrative of tobacco use in potential growth markets around the world.
The Supreme Court agreed that a DCF is an appropriate concept for the business court to use under NCGS § 55-13-01 (5), but declined to say that North Carolina law requires it be used “in all cases”. Identifier. ¶ 22. The Commercial Court rejected the Dissenters’ DCF as “an extreme outlier” compared to “any other evidence of value” considered by the court. Identifier. ¶ 23. The proposed DCF advanced a share price of $ 92.17 which, according to the commercial court, “implies an erroneous valuation of $ 50 billion of RAI shares” below the transaction price. Username.
The Supreme Court also ruled that the effectiveness of an analysis based on market prices is enhanced when the market has digested and valued public information about the company in such a way that it is “incorporated into the stock price. of the society “. Identifier. ¶ 33. Reynolds did not present expert testimony on the effectiveness of the market and, in his absence, the dissenters argued that the Business Court could not reach such a conclusion. The Supreme Court concluded that expert testimony is not required “if the party has presented sufficient evidence regarding the relevant factors to enable the trial court to make its own decision on effectiveness”. Identifier. 40.
Dissenters argued for the inclusion of a “control premium” in the share price when their action would allow BAT to control Reynolds. Judge Earls’ opinion notes that the trial court “concluded that the price of listed companies categorically does not reflect an implied minority discount.” Identifier. ¶ 56. Noting “the unstable nature of law and scholarship” on the issue, the Supreme Court refused to adopt such a “general rule”. Instead, the Court held that trial courts should decide on a case-by-case basis, depending on the valuation methods employed, whether a minority haircut is present and whether it should result in a control premium. Identifier. 57-58.
Take away food
- The tendency of the Supreme Court to allow the Business Court the flexibility to make a judicial assessment and apply such analytical factors as it deems appropriate is underscored by Earls J.’s observation that “the fair value of a society cannot be determined by mathematical proof ”. Identifier. 71.