72 N.Y.2d 465 (1988)

When determining the fair value of dissenting shareholders’ stock in a merger, courts must consider all relevant factors, including nonspeculative post-merger tax benefits accruing to the acquired corporation, and these benefits must be distributed proportionately among all shareholders of the same class.

Summary

Cawley, a dissenting shareholder in the merger of SCM Corporation with HSCM Merger Company, sought an appraisal of his shares, arguing that the merger’s tax benefits to SCM, particularly those arising from his exercised incentive stock options (ISOs), increased the fair value of his stock. The New York Court of Appeals held that dissenting shareholders are entitled to receive fair value determined by considering all relevant factors, including nonspeculative tax benefits accruing to the corporation from the merger. The court further held that these tax advantages must be distributed proportionately among all shareholders of the same class, and remanded the case for a hearing.

Facts

Hanson Trust PLC initiated a hostile tender offer for SCM. SCM initially rejected the offer but later entered a merger agreement with Merrill Lynch. After a series of competing offers and litigation over lock-up options, Hanson acquired control of SCM and completed a merger, purchasing remaining shares at $75 per share. Cawley, an SCM treasurer, dissented from the merger, arguing that his ISO shares were worth more due to SCM’s tax deductions resulting from the merger triggering a disqualifying disposition of those shares.

Procedural History

Cawley filed a petition in Supreme Court, New York County, seeking a determination of the fair value of his shares, which was dismissed. The Appellate Division affirmed the dismissal. Cawley then appealed to the Court of Appeals of the State of New York.

Issue(s)

1. Whether the lower courts abused their discretion by disregarding the tax deduction that SCM became entitled to upon the consummation of its merger with HSCM Merger Company, Inc. in assessing the fair value of SCM Corporation stock.
2. If so, whether the value of this postmerger factor should have been distributed equally among all of SCM’s stockholders or solely to those stockholders whose shares were responsible for this tax advantage.

Holding

1. Yes, because Business Corporation Law § 623 (h) (4) authorizes courts to consider relevant post-merger factors, including prospective tax benefits of a given transaction, in determining fair value.
2. The value should be spread equally among all shareholders of SCM common stock because Business Corporation Law § 501(c) mandates that each share shall be equal to every other share of the same class.

Court’s Reasoning

The court reasoned that the 1982 amendment to Business Corporation Law § 623(h)(4) requires courts to consider “all other relevant factors” in determining fair value, including post-merger effects on the corporation. This includes prospective, nonspeculative tax benefits accruing to the acquired corporation from the merger. The court noted that the deduction for acquisition of the ISO shares was a corporate asset of SCM that represented value and arose from the merger. However, because ISO shares were identical in all respects to SCM common stock held by the investment public, Business Corporation Law § 501(c) mandates that ISO shareholders be treated no differently from other SCM common stockholders. The court stated that a dissenting shareholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern. The court rejected Cawley’s argument that his personal income tax situation should be considered because it did not affect the value of SCM’s common stock. The dissenting judge argued that the lower courts properly applied the fair value appraisal criteria and that the majority’s decision effects an asset-specific accounting, complicating appraisal proceedings. Justice Bellacosa dissented that implementation of an appraisal proceeding requires that shares of the same class be equal in all respects to every other share of the class.