In re 75,629 Shares of Common Stock of Trapp Family Lodge, Inc.

Trapp Family Lodge, Inc. (TFL) (defendant), a Vermont corporation, owned a lodge facility, a guest-house option, and some excess land. TFL planned a merger with another company, and certain minority shareholders (dissenters) (plaintiffs) dissented from the merger. The dissenters brought an action for a judicial valuation. Both TFL and the dissenters presented expert testimony. TFL’s expert, Arthur Haut, used a capitalized-cash-flow analysis to value the lodge, a discount to the option price to value the guest-house option, and a prior real estate appraisal to value the excess land. Haut concluded that TFL was worth $33.84 per share. The dissenters’ expert, Howard Gordon, used a net-asset-value methodology. The asset values were determined based on discounted cash flows and the same real estate appraisal. As to the cash flows, Gordon projected future earnings as increasing 3 percent per year and applied an 8.6 percent discount rate. Gordon also made adjustments for certain nonrecurring expenses and concluded that the fair value was $63.44 per share. The trial court largely agreed with Gordon, also finding that the fair value was $63.44 per share. TFL challenged the trial court’s valuation. On appeal, TFL first argued that the trial court failed to make an independent valuation and instead sided wholesale with Gordon. Second, TFL argued that Gordon’s growth projections and discount rate were unreasonable. Third, TFL argued that the trial court inaccurately analyzed the real estate appraisal. Fourth, TFL argued that the trial court should have considered the agreed values set forth in the shareholders’ restriction agreement, which provided that shareholders intending to sell shares to anyone other than family members or TFL were required to first offer them to other shareholders for $30.92 per share. Finally, TFL argued that the trial court should not have applied a 30 percent control premium. Although Gordon had testified that such a premium was appropriate, in TFL’s view, the trial court should not have adopted this reasoning.