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Corporate — Merger Dissenters – Stock Purchase – Fair Value – First Impression

This case arises from the merger of Reynolds American Inc. (RAI) and British American Tobacco (BAT) and certain shareholders’ (dissenters’) claim that the price paid to RAI shareholders as a result of the merger was unfair. In our first consideration of an appeal from a Business Court judgment determining the fair value of a dissenting shareholder’s shares pursuant to G.S. § 55-13-01 et seq., we hold that the Business Court’s use of various “customary and current valuation concepts and techniques” to determine the fair value of the dissenters’ shares was appropriate under our statutory framework.

We affirm the Business Court’s conclusion that the dissenters were paid fair value for their shares.

The merger consideration included 0.5260 shares of BAT plus $29.44 in cash. On the date of the merger agreement, this consideration was worth $59.64 per RAI share. The transaction ultimately closed on 25 July 2017. On this date, the merger consideration was worth $65.87 per RAI share. The transaction was “overwhelmingly approved” by a majority of RAI’s outstanding shares, including 99 percent of the non-BAT-owned shares which were voted in the merger.

RAI paid the dissenters “the amount the corporation estimates to be the fair value of their shares,” $59.64, “plus interest.” §§ 55-13-22, 55- 13-25(a). The dissenters refused to accept this offer and conveyed their belief that the fair value of their shares was between $81.21 and $94.33 per share.

The Business Court conducted a thorough analysis and concluded that “under the circumstances present here … the resulting deal price is reliable evidence of RAI’s fair value.” This approach represents an appropriate exercise of the Business Court’s discretion to select valuation methodologies under § 55-13-01(5).

The Business Court plainly utilized many “customary and current valuation concepts and techniques” in addition to considering the deal price when determining fair value.

Market Check

When the directors of a corporation being sold have completed a market check, there is typically reason to believe that the deal price reflects fair value. However, we disagree with the dissenters that a court necessarily abuses its discretion when it credits the deal price resulting from a transaction during which a formal market check was not completed.


While a court may choose to rely upon a discounted cash flow (DCF) analysis to determine fair value, nothing in North Carolina’s appraisal statutes demands that the Business Court do so in every case.

The valuation resulting from Dr. Mark Zmijewski’s DCF analysis “far exceeds any other evidence of value in the record and suggests that RAI’s management, RAI’s Board, RAI’s Financial Advisors, RAI’s shareholders, stock market analysts, and the market itself mispriced RAI by as much as $50 billion.”

Although a court might appropriately choose to credit the outlier results of a DCF analysis when there are reasons to distrust other proposed valuation methodologies, such a dramatic divergence as exhibited here—attributable almost entirely to the modeler’s choice of value on a single input—reasonably gave the Business Court cause to doubt the reliability of Dr. Zmijewski’s analysis.

The Business Court did not abuse its discretion in choosing not to credit the results of Dr. Zmijewski’s DCF analysis.

Missing Witness Rule

The missing witness rule allows the fact-finder to draw an inference regarding a disputed factual issue that is adverse to a party who fails to call an available witness with peculiar knowledge of the fact to be established.” This court has not formally adopted the missing witness rule.

Even assuming that the missing witness rule is recognized in North Carolina, nothing compels the fact-finder to ultimately draw the requested inference.

Here, RAI’s expert, Paul Gompers, relied on an expert report by Anil Shivdasani, but Shivdasani did not testify. Since the dissenters could have introduced Shivdasani’s deposition testimony but chose not to, the Business Court was entitled to presume that the substance of his testimony would not have bolstered the dissenters’ argument.

Market Efficiency

We decline to adopt a bright-line rule which would prohibit a court from finding that the market for a corporation’s shares is semi-strong efficient in the absence of direct expert-witness testimony.

In its determination that the market for RAI’s shares was semi-strong efficient—and which, by extension, supported its decision to credit Gompers’s adjusted unaffected stock price analysis in its fair value determination—the Business Court considered factors set out in Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989), which was a “fraud on the market” case.  However, the Business Court also relied upon other cases in which courts considered many of the same factors examined by the Business Court when assessing market efficiency for the purposes of conducting a judicial appraisal. Moreover, Delaware courts have explicitly relied upon the Cammer factors in this same context.

We find these cases persuasive. Accordingly, the Business Court did not err when it examined these factors in assessing market efficiency.

Control Premium

The dissenters argue that Gompers’s adjusted unaffected share price analysis did not reflect the fair value of their shares because the analysis “did not reflect a control premium.” A control premium is an upward adjustment to the value of stock when the block of stock being valued enables the holder to control the corporation.

A court’s decision to find that a particular market-based method of valuing a corporation does or does not reflect an implicit minority discount—and a court’s separate decision to allow or reject a dissenting shareholder’s claim to their pro rata portion of a control premium—should be based on the record before the court in each particular case.

Here, the dissenters have not identified record evidence supporting their assertion that RAI’s share price reflected an implicit minority discount. Accordingly, the Business Court did not err in crediting Gompers’s adjusted unaffected stock price analysis without accounting for an implicit minority discount.


Reynolds American Inc. v. Third Motion Equities Master Fund Ltd. (Lawyers Weekly No. 010-163-21, 56 pp.) (Anita Earls, J.) Appealed from Forsyth County Superior Court (Louis Bledsoe, C.J.) Donald Tucker, Christopher Capel, Clifton Brinson and Gary Bornstein for plaintiff-appellee; Jessica Thaller-Moran, Jennifer Van Zant, Lawrence Rolnick, Sheila Sadighi, Jennifer Randolph, George Sanderson, Kevin Abrams, Peter Shindel, Kieran Shanahan, Brandon Neuman and Christopher Battles for defendant-appellants; no brief for defendant-appellees. 2021-NCSC-162

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