                   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
                                           6


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.
                                       14


              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.
                                          15


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.
