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Stockholders Agreement Method
Mr. Engstrom relies upon the valuation formula contained in
the September 1, 1989, stockholders agreement as an indication of
the fair market value of HII stock. Applying the valuation
formula, he determined that the value of the company was equal to
$38 million, or $380,000 per share,27 as of November 15, 1995.
This amount represents the value he derived under the net worth
(book value) formula; i.e., the higher value derived under the
formula in the stockholders agreement.
Respondent argues that although the redemption agreement
terminated the stockholders agreement, the values derived under
it reflect an agreed methodology for establishing fair market
value between knowledgeable parties and as such are part of the
facts and circumstances that may be taken into consideration in
27Mr. Engstrom determined that the valuation formula would
most likely be applied to transactions involving minority
interests, because the owner of a controlling interest would most
likely liquidate his ownership interest through a sale of the
entire company. Mr. Engstrom opined that the formula price, 2
times book value, contained built-in marketability and minority
interest discounts. We are not persuaded that this is the case.
The formula provision by its terms applies to both the majority
shareholder, Mr. Hess, and the minority shareholder, Mr.
Kucklick, in the circumstances specified in the agreement. We
also point out that Mr. Engstrom applied discounts in his net
asset value analysis. Respondent submits that the indicated
value under the stockholders agreement would be $242,250
($380,000 x .85 x .75), if the discounts determined by Mr.
Engstrom were applied.
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