J-A12039-15

NON-PRECEDENTIAL DECISION – SEE SUPERIOR COURT I.O.P 65.37

KEITH A. SHAFFER,                          : IN THE SUPERIOR COURT OF
                                           :      PENNSYLVANIA
                    Appellee               :
                                           :
            v.                             :
                                           :
VISAGGIO’S, INC.,                          :
                                           :
                    Appellant              : No. 1959 MDA 2014

                 Appeal from the Order entered October 20, 2014,
                   Court of Common Pleas, Cumberland County,
                          Civil Division at No. 2009-02122

BEFORE: BOWES, DONOHUE and ALLEN, JJ.

DISSENTING MEMORANDUM BY DONOHUE, J.:                  FILED JULY 29, 2015

      Based upon my review of the certified record on appeal, I must

respectfully dissent.      In this case, William A. Duncan (“Duncan”), a

statutorily-appointed appraiser, received evidence and issued a report to the

trial court analyzing the fair value of the stock owned by dissenting

shareholder and appellee, Keith A. Shaffer (“Shaffer”), in appellant,

Visaggio’s, Inc. (“Visaggio’s). In my view, the trial court erred in adopting

Duncan’s report, as it is unsupported by any evidence in the certified record.

      During the evidentiary proceedings before Duncan, Shaffer and

Visaggio’s each called real estate and business valuation experts to present

reports and offer supporting testimony.1      To understand the reports and




1
   The parties also called separate expert witnesses regarding the proper
valuation of Visaggio’s real property. Because on appeal neither party has
J-A12039-15


testimony of the business valuation experts, it is important to review the

applicable law relevant to the determination of the fair value of a dissenting

shareholder’s stock.   In In re Glosser Bros., Inc., 555 A.2d 129 (Pa.

Super. 1989), this Court distilled and explained at length the basic valuation

principles described in O’Connor Appeal, 304 A.2d 694 (Pa. 1973).          In

O’Connor, our Supreme Court instructed that “fair value” for a dissenting

shareholder’s stock refers to going concern value (i.e., the value of the

business as a continuing enterprise, without regard to the effects of the

impending merger), rather than liquidation value (i.e, the amount that could

be obtained by selling the corporation’s remaining assets upon a cessation of

business operations). Id. at 698. In Glosser Bros., this Court described

the proper methodology to determine the going concern value of a

dissenting shareholder’s stock as follows:

            The “going concern” concept of fair value in a
            dissenting shareholders' appraisal proceeding and
            the many individual factors comprising it were aptly
            described by the Delaware Supreme Court in Tri–
            Continental Corp. v. Battye, 74 A.2d 71, 76 (Del.
            1950):

                  The basic concept of value under the
                  appraisal is that the stockholder is
                  entitled to be paid for that which has
                  been    taken    from    him,    viz.,  his
                  proportionate interest in a going concern.
                  By     value    of    the     stockholder’s
                  proportionate interest in the corporate


disputed the trial court’s adoption of Duncan’s real estate valuation, I will
not address any such issues herein.


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                  enterprise is meant the true or intrinsic
                  value of his stock which has been taken
                  by the merger. In determining what
                  figure represents this true or intrinsic
                  value, the appraiser and the courts must
                  take into consideration all factors and
                  elements which might reasonably enter
                  into the fixing of value. Thus, market
                  value, asset value, dividends, earning
                  prospects, the nature of the enterprise
                  and any other facts which were known or
                  which could be ascertained as of the date
                  of the merger and which throw any light
                  on future prospects of the merged
                  corporation are not only pertinent to any
                  inquiry as to the value of the dissenting
                  stockholders' interest, but must be
                  considered by the agency fixing the
                  value.

     Id. at 72.

           The O'Connor [C]ourt noted that courts had
           properly distilled all of these factors into three
           principal valuation methods, i.e. (1) net asset value;
           (2) actual market value; and (3) investment value.
           The court defined these valuation methods as
           follows:

                  Net Asset Value is the share which the
                  stock represents in the value of the net
                  assets of the corporation. Such assets
                  include every kind of property and value,
                  whether realty or personalty, tangible
                  and intangible, including good will and
                  the corporation’s value as a going
                  concern.

                  Investment Value is an estimate of
                  present worth in light of past, present
                  and prospective financial records of the
                  company and is obtained by capitalizing
                  earnings. There are two basic steps in



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                 the capitalization process: calculation of
                 a representative annual earnings figure,
                 and choice of a capitalization ratio which
                 reflects the stability and predictability of
                 earnings of the particular corporation.

                 Market Value refers to the price at
                 which the stock was selling on the
                 market prior to the action which is
                 objected to, disregarding any change in
                 price due to the action.

           [O'Connor, 304 A.2d at 698 n.7]

Glosser Bros., 555 A.2d at 133-34.

     Expanding upon the valuation methods described in O’Connor, in

Glosser Bros. we offered the following additional discussion of appropriate

valuation methodology in this context:

           [W]e do not read the O'Connor opinion as limiting a
           trial court to a consideration of only these three
           valuation methods. Id. at [] 697–98. Financial
           analysis has become increasingly complex with the
           passage of time.          New methods of valuing
           investments have been developed and are generally
           accepted in the financial community as being
           reliable.     In recognition of this fact, other
           jurisdictions that previously restricted a trial court to
           the foregoing three valuation methods have now
           expanded the types of valuation information that
           may be considered in a stock valuation proceeding.
           For example, in Weinberger v. UOP, Inc., 457
           A.2d 701 (Del. 1983), the Supreme Court of
           Delaware, known for its expertise in these matters,
           directed that Delaware courts would no longer be
           bound to use only the traditional “Delaware block” or
           weighted average approach to valuation. By this
           method, which is still generally in use in
           Pennsylvania and which was applied by the trial
           court in the instant case, the court considers only the



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           three traditional methods of valuation, assigns each
           a percentage weight and adds the resulting amounts
           to come to a total value. The Weinberger court
           found this approach too restrictive and directed that
           courts henceforth use a “more liberal approach
           [which] must include proof of value by any
           techniques or methods which are generally
           considered acceptable in the financial community
           and otherwise admissible in court....” Id. at 712–13.

Glosser Bros., 555 A.2d at 134.

     To summarize, pursuant to Glosser Bros., going concern value is

determined by using the “Delaware Block” method, whereby the trial court

employs a “weighted average approach to valuation,” assigning a percentage

of weight to the net asset value, investment value, and market value of the

company to arrive at the fair value of the company.2     Id. at 133-34.   In

accordance with Weinberger, however, where the Delaware Block method

would be too restrictive under the specific circumstances presented, a trial

court in appropriate cases may instead utilize “any techniques or methods

which are generally considered acceptable in the financial community and

otherwise admissible in court.” Id.


2
   Glosser Bros. presented an unusual situation in which 50-60% of the
corporation’s stock was closely held by management and family while the
remaining stock was publicly traded. Id. at 131. The trial court applied the
Delaware Block approach, but decided not to include the market approach
and instead weighted the net asset value at 65% and the investment value
at 35%. Id. at 136. This Court reversed, concluding that the trial court
erred in excluding market value from its calculation, since although public
trading was thin, there was no evidence of market manipulation or control to
justify ignoring market value entirely. Id. at 135-36. In reversing, we
remanded the case with instructions to assign a weight to the market value
and include it in the valuation analysis. Id. at 136.


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      With these valuation principles in mind, in this case two business

valuation experts offered reports and testimony on the going concern value

of Visaggio’s’ stock at the evidentiary proceedings before Duncan. William

Boles (“Boles”), a business valuation expert retained by Visaggio’s, testified

regarding the findings set forth in his report. Boles described his valuation

methodology to determine the going concern value of Visaggio’s’ stock as

follows:

            In our valuation of Visaggio’s, Inc., we considered all
            three approaches to value.         Under the income
            approach, we utilized the capitalized earnings
            method. Under the market approach, we utilized the
            market value of invested capital to sales method.
            Under the asset approach, we used the formula
            method (also known as the excess earnings
            method), which computes a goodwill factor.

Visaggio’s, Inc. Valuation of Common Stock, 12/31/2007, at 42 (Exhibit 11).

For the income value, using the capitalized earnings approach, Boles utilized

a weighted average of annual net income from 2004-2007 ($22,180) and

applied a capitalization rate of 21.80% to arrive at a “[t]otal indicated value

before contingent liability” of $101,743. Id. at Exhibit 11, Schedule 2. For

the market value, using the invested capital to sales method, Boles

computed a weighted average of annual sales for the years 2004-2007

($1,434,542) and applied an industry multiple (.34) to arrive at an

“[i]ndicated value of operating assets plus goodwill” of $487,714.      Id. at

Exhibit 11, Schedule 3. For the net asset approach, Boles used the formula




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J-A12039-15


method to calculate the value of the company’s goodwill ($6,586).           Id. at

Exhibit 11, Schedule 5.        He then added the shareholders’ equity from the

financial statements (-$148,268) with the net value of the real estate

($333,237) and goodwill, to arrive at a “[t]otal indicated value before

contingent liability” of $191,555. Id. at Exhibit 11, Schedule 4. Because all

three of these valuations were dwarfed by contingent liabilities for unpaid

wages and unfunded pension obligations of $1.3 million,3 however, Boles

concluded that the value of Visaggio’s’ stock was $0. Id. at 6, Exhibit 11,

Schedules 2-4.

        Shaffer offered the testimony of business valuation expert James

Smelzer (“Smelzer”).          Smelzer testified that in general he found Boles’

approach to be “reasonable.” N.T., 1/13/2010, at 97. As a result, Smelzer

did not perform his own independent valuations, and instead used Boles’

numbers as the baseline for his going concern valuations. Smelzer modified

Boles’ net asset, investment, and market valuations by making four material

modifications: (1) he used the real estate valuation from Shaffer’s expert;

(2) he adjusted the shareholders’ equity (book value) from (-$148,268)

to     (-$119,465);     (3)    he   added   $111,747   in   non-operating   assets

(marketable securities) that Boles excluded; and (4) he disagreed with any

deductions      for   unpaid    wages   and/or   unfunded    pension   obligations.

Comparison of Expert Appraiser’s Reports, 12/11/2009, Exhibit D.            Of the


3
     I agree with the Majority’s thoughtful analysis on this issue.


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J-A12039-15


three methods utilized by Boles, Smelzer found the invested capital to

annual sales method to be “the most appropriate approach” for Visaggio’s,

N.T., 1/13/2010, at 131, and using Boles’ baseline number of $487,714 and

applying the four modifications, he valued Visaggio’s’ stock at $799,461,

with Shaffer’s 25% interest thus equaling to $199,865.

        After receiving testimony on January 13-14, 2010 and June 4, 2010,

Duncan conducted a view of Visaggio’s’ property and operations on July 27,

2010, at which time he requested that Visaggio’s produce its insurance

policies. Thereafter, on November 1, 2010, Duncan filed his report with the

trial   court,   in   which    he   offered   the     following   straightforward

recommendation:

                              VII. APPRAISER’S FINDINGS

        1. Valuation of Real Estate - $1,800,000.00

        The hotel rooms and liquor license should be considered but not to the
        extent promoted by Shaffer’s appraiser for the reasons presented by
        the Lamadues.

        2. Business Equipment - $325,000

        The insurance coverages were considered together with the
        Appraiser’s view of the premises. The equipment is used, readily
        available, not unique and in some cases, very dated.

Report of Appraiser, 11/1/2010, at 13.

        By order and opinion dated October 20, 2014, the trial court adopted

Duncan’s valuation without modification, concluding that it “bear[s] a

reasonable relationship to the values established by the parties’ experts and



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J-A12039-15


is clearly supported by substantial evidence.” Trial Court Order and Opinion,

10/20/2014, at 7. After subtracting the $1.6 million debt on the real estate,

the trial court concluded, based solely on Duncan’s report, that the value of

Visaggio’s’ real estate was $200,000, the value of its business equipment

was $325,000, and Shaffer’s 25% share of the total value of $525,000 was

thus $131,250. Id.

     On appeal, Visaggio’s contends that the trial court erred in adopting

Duncan’s valuation of $325,000 for its business equipment.      According to

Visaggio’s, during the evidentiary proceedings, neither party submitted any

evidence on the value of the business equipment and the business valuation

experts did not assign any value to the equipment. Visaggio’s’ Brief at 15.

As a result, Visaggio’s contends that the $325,000 valuation is not supported

by any evidence of record.4 Id.

     I agree with Visaggio’s that the trial court’s finding that the value of

Visaggio’s business equipment at the time of the merger was $325,000 is

unsupported by any competent and substantial evidence of record. The trial

court appointed Duncan pursuant to section 1579(c) of the Business



4
   Visaggio’s also argues that Duncan’s viewing on July 27, 2010 and the
insurance policies he subsequently received were both de hors the
evidentiary record because the evidentiary record closed on June 4, 2010
(the final day of testimony). Visaggio’s Brief at 15-17. On this issue, I
agree with the Majority that there is no basis in the certified record on
appeal to conclude that the evidentiary record before Duncan was closed at
the time of the viewing and the receipt of the insurance policies. Maj.
Memorandum 9-10.


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Corporations Law, which provides in relevant part that “[t]he court may

appoint an appraiser to receive evidence and recommend a decision on the

fair value.” 15 Pa.C.S.A. § 1579(c).5 Although apparently never addressed

by our appellate courts, pursuant to this provision a trial court could

presumably appoint an expert in business valuation, who would then receive

evidence necessary and relevant to perform a Glosser Bros.-type going

concern analysis (e.g., financial statements), and prepare a fair value

recommendation to the trial court based upon this evidence. In the present

case, however, Duncan is an attorney and the certified record contains no

indication that he has any expertise or qualifications as a business valuation

expert.6   As such, Duncan’s proper role here was more akin to that of a

special master,7 namely to receive evidence in the form of conflicting expert




5
    Section 1579(c) further provides that the appointee “shall have such
power and authority as may be specified in the order of appointment or in
any amendment thereof.” Id. In its order appointing Duncan, the trial court
did not confer any special power or authority on him, instead merely
directing that he “make a recommendation to the court as to the value of
the stock.” Trial Court Order, 6/1/2009, at 1.
6
   In its order and opinion adopting Duncan’s report, the trial court cites to
our Supreme Court’s admonition that valuation issues in dissenting
shareholder litigation are “rather economic than legal in character” and thus
can “better be derived by consulting the business man, the banker, and the
industrial engineer, than the jurist, legal scholar, or lawyer.” Trial Court
Opinion, 10/20/2014, at 3-4 (quoting Watt & Shand, 283 A.2d 279, 280-81
Pa. 1971)).
7
  For example, in divorce or annulment proceedings, Rule 1920.51 of the
Pennsylvania Rules of Civil Procedure provides that the trial court may


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testimony   on   the   going   concern   value   of    the   stock   and    make    a

recommendation to the trial court based upon that evidence.

      Duncan clearly failed to fulfill his proper role.       While he did receive

evidence from business valuation experts (Boles and Smelzer), in his report

to the trial court he ignored entirely their reports and testimony.                In

significant contrast to the efforts of Boles and Smelzer to conduct valuations

generally in accordance with the Delaware Block methodology prescribed by

Glosser Bros., Duncan explains in his report that he arrived at his $325,000

valuation for the business equipment merely by reviewing the insurance

coverages “together with the Appraiser’s view of the premises.” Report of

Appraiser, 11/1/2010, at 13.      In other words, Duncan valued Visaggio’s’

business equipment by starting with the value provided by the company’s

casualty insurance provider ($642,000),8 and then adjusted this number

downward based upon his own observation of the equipment (which he




appoint a master to hear the evidence                 and    issue   a   report   and
recommendation. Pa.R.C.P. 1920.51(a)(1).
8
   Perhaps because Visaggio’s’ insurance policies were not produced until
after all the witness testimony had been received, the certified record
contains no information regarding what specific equipment was insured (or
excluded from coverage), or how the figure of $642,000 was derived.
Moreover, neither Shaffer nor the trial court has cited to any authority
suggesting that insurance values have any relevance in a determination of a
business’ going concern value. The expert reports of Boles and Smelzer do
not indicate that either of them requested or reviewed Visaggio’s’ insurance
policies when they performed their going concern valuations, or otherwise
suggest that such information would have assisted them in any way.


                                    - 11 -
J-A12039-15


described as “used, readily available, not unique and in some cases, very

dated”).

      As such, unlike Boles and Smelzer, who each valued Visaggio’s as a

going concern as per Glosser Bros., Duncan chose to employ an entirely

different methodology, one that bore no relation to, and did not rely in any

respect upon, the work performed by the two business valuation experts.

While neither Boles nor Smelzer assigned any specific value to Visaggio’s’

business equipment, assigning a value to the business equipment was

Duncan’s principal (sole) focus. In this regard, it is important to note that

Duncan’s $325,000 valuation does not constitute a going concern value for

the business equipment, but rather his own estimate of the equipment’s

liquidation value, i.e., his estimate of what the equipment might fetch in a

sale to a willing buyer in its present condition (“used, readily available, not

unique and in some cases, very dated”).        This was itself improper. 9   See



9
   Even a cursory review of Duncan’s analysis reflects that it falls far short of
the methodology described in Glosser Bros. Duncan did not apply a
“Delaware Block” weighted average of net asset value, investment value,
and market value to arrive at the fair value of Visaggio’s’ stock. Glosser
Bros., 555 A.2d at 133-34. Moreover, neither Duncan nor the trial court
offered any basis for employing a deviation from the Delaware Block method
(per Weinberger), and nothing in the certified record indicates that
Duncan’s approach constituted an alternative methodology “generally
considered acceptable in the financial community.” Id.

This appeal cannot, however, be decided on this basis. In the proceedings
before the trial court, Visaggio’s raised this issue of Duncan’s failure to follow
the Glosser Bros. methodology to determine going concern value.
Exceptions to the Report of Appraiser, 11/30/2010, ¶¶ 19-20 (“Mr. Duncan


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J-A12039-15


Glosser Bros., 555 A.2d at 133 (“fair value is to be construed as going

concern value, as contrasted with liquidation value”).

      For these reasons, I cannot agree with the Majority that Duncan’s

$325,000 valuation is supported by competent and substantial evidence.

The Majority cites to testimony from Boles suggesting that the “value of the

furniture, fixtures, and equipment and inventory” was $191,555.        Maj.

Memorandum at 17.        A review of Boles’ report, however, shows that

$191,555 did not constitute a valuation of Visaggio’s’ business equipment,

since he arrived at this number by adding the shareholders’ equity from the

financial statement (-$148,268) with the net value of the real estate

($333,237) and goodwill ($6,586).     Visaggio’s, Inc. Valuation of Common

Stock, 12/31/2007, at 42 (Exhibit 11, Schedule 4). As such, while the book

value10 of the business equipment may have been included as one



did not consider any of the factors laid out by the Glosser court.”).
Visaggio’s did not raise this issue on appeal, however, and therefore it is
waived.
10
     In O’Connor, our Supreme Court observed that book value “does not
accurately represent the fair value of the corporate assets,” and that the
“suggestion that the book value of the shares is any measure of their value
is clearly fallacious.” O’Connor, 304 A.2d at 700.

The Majority correctly notes that book values for Visaggio’s’ business
equipment were listed in its annual financial statements. Maj. Memorandum
at 15-16. Even to the extent that (per O’Connor) these values provided
any indication of the going concern value of the business equipment,
however, Duncan’s report makes clear that he did not rely upon them in
reaching his $325,000 valuation, as he instead relied solely upon the
insurance policies and his own view of the equipment. Accordingly, the book


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J-A12039-15


component of the shareholder’s equity portion of this calculation, the

$191,555 figure also includes other items, including real estate and goodwill,

and thus does not represent the value of the business equipment.

      The Majority also cites to testimony from Smelzer suggesting that the

value of the equipment was $487,714.         Maj. Memorandum at 17.        As

discussed hereinabove, however, Boles’ valuation report (from which

Smelzer obtained this number) shows that Boles arrived at $487,714 by

multiplying a weighted average of annual sales for the years 2004-2007 with

an industry multiple. Id. at Exhibit 11, Schedule 3. Accordingly, $487,714

represents a capitalization of Visaggio’s’ annual sales, not the value of its

business equipment.

      In sum, Duncan’s valuation of Visaggio’s’ stock is not supported by any

competent or substantial evidence of record, and does not even reflect a

going concern valuation as is required by law in this context.        To the

contrary, because Duncan has no expertise in the valuation of business

equipment (belonging to hotels, restaurants, or otherwise), his report

constitutes, at best, his speculation regarding the liquidation value of the

business equipment. As a result, the trial court erred as a matter of law in

adopting Duncan’s $525,000 valuation of Visaggio’s.     Accordingly, I would




values of the equipment in the financial statements provide no support for
Duncan’s $325,000 valuation.


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reverse the trial court’s decision and remand this case to the trial court for

further proceedings consistent herewith.




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