Hotchkiss v. Fischer

Supreme Court of Kansas · Corporations

CorporationsStock valuationDirector-stockholder transactionsFraud damagescorporate stockactual valueno market valuenet assets

Facts

Plaintiff, a widow and administratrix, owned 2,320 shares of Elmhurst Investment Company stock inherited from her husband. In January 1927, after asking defendant, the company's president and managing officer, about the stock and whether a dividend would be declared, she sold him her shares for $1.25 per share; the next day a $1 dividend was declared. She sued for fraud, alleging defendant made false statements and failed to disclose information to which she was entitled. On retrial, the jury found for plaintiff, but awarded less than she claimed because it did not adopt her proposed valuation based solely on assets minus liabilities.

Issue

In fixing fraud damages for a stockholder who sold shares to a corporate director, must the actual value of closely held or unlisted stock be determined solely by subtracting liabilities from assets and dividing by the number of shares, or may the jury consider other factors bearing on actual value? Also, could the appellate court increase the verdict on the theory that the jury misapplied a mathematical formula?

Rule

If stock has no ascertainable market value, its actual value is not determined solely by net asset value. The factfinder may consider the value of corporate assets, indebtedness and liabilities, any market evidence, opinion evidence from persons with peculiar knowledge, the nature and permanency of the business, dividends paid, the number and distribution of shares and stockholders, management, book value, and other legitimate circumstances bearing on value; no single factor is controlling.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Wichita, Nora Bennett sold her shares in Prairie Lantern Energy, a closely held drilling company, to its chief manager after he fraudulently understated the company's prospects. At trial, the shares had no exchange listing and no regular market, but the evidence showed substantial assets, significant debt, no steady dividends, and a risky exploration business.

If Nora proves fraud, how should the factfinder determine the actual value of her shares for damages?

Explanation. When stock has no ascertainable market value, actual value is not fixed by any single formula. The trier of fact may consider assets, liabilities, market evidence if any, opinion evidence from knowledgeable persons, the business carried on, dividends, stock distribution, management, book value, and other relevant circumstances. Net asset value is important but not controlling. (Derived from Hotchkiss v. Fischer (n.d.).)