Bell v. Kirby Lumber Corp.

Santa Fe Industries, Inc. (Santa Fe) was the parent of subsidiary company Kirby Lumber Company (Kirby) (defendant). Santa Fe held 95 percent of Kirby stock. In fall 1973, Santa Fe sought to acquire the remaining 5 percent of Kirby stock, consisting of 25,000 shares, through a short-form merger under Delaware law. To further the merger, Santa Fe hired an appraiser, W. D. Davis, to provide an appraisal of Kirby’s assets. Santa Fe also hired the investment banking firm Morgan Stanley & Company to give an opinion of the fair market value of the minority stock. Davis appraised the business and assets at $320 million, and Morgan Stanley declared the fair market value of Kirby stock to be $125 per share. Edith Bell and other owners of 5,000 shares (collectively, Bell) (plaintiffs) of Kirby stock dissented from the short-form merger and demanded appraisal of their shares under Delaware law. An appraiser was appointed and found that the per-share value was $254.40. The appraiser found an earnings value of $120 per share and an asset value of $456 per share. The appraiser then assigned 60 percent of the valuation weight to earnings and 40 percent to assets. Bell filed exceptions to the appraisal with the vice-chancellor of the Court of Chancery, who denied the exceptions. Bell then appealed to the Delaware Supreme Court. Bell argued that the context of entire fairness under the appraisal statute and the rule of close judicial scrutiny required the court to determine value based on negotiations in a hypothetical arms-length purchase. Under that methodology, Bell contended, the value of Kirby’s timber assets would demand a higher per-share valuation. At the time of the appraisal, the price of timber was appreciating in value. In response, Kirby argued that earnings should be the driving factor in appraisal because the per-share valuation depended on Kirby’s ability to manufacture and market timber-derived products such as lumber.