Richard L. Hubbell, M.D., a former director and president of Sumner Anesthesia Associates, Inc. (SAA), filed a lawsuit seeking the fair value of his shares in SAA after his termination on October 25, 2006. Hubbell claimed ownership of 29% of the shares, alleging that SAA did not purchase his shares as required by the Tennessee Professional Corporation Act. In response, SAA contended that there were five shareholders, each with 20% ownership, and argued that the fair value of Hubbell’s shares was $760.48, an amount deposited with the court. SAA calculated this value based on various assessments of its total shareholders' equity for different time periods in 2006, providing Hubbell with financial statements to support its valuation. The trial court initially granted summary judgment in favor of SAA, but the Court of Appeals reversed this decision and remanded the case for further proceedings, highlighting that Hubbell had not adequately countered SAA's proposed valuation.
SAA filed a Motion for Summary Judgment, supported by a Statement of Material Facts and affidavits from its president, Dr. Thomas Mark Carter, and accountant, Ronnie C. Fox. Dr. Hubbell responded, claiming deficiencies in SAA's Statement, asserting that there were material facts in dispute, necessitating further discovery to assess the value of his shares. He alternatively contended that if SAA was not a professional corporation, it should still acquire his shares due to the impracticality of exercising his rights as a shareholder. SAA acknowledged its status as a professional corporation governed by the Tennessee Professional Corporation Act. The trial court, after a hearing on June 30, 2008, issued an amended order on July 30, 2008, granting summary judgment to SAA, concluding that there were no genuine issues of material fact. It found that Dr. Hubbell, as a stockholder and director, was entitled to his stockholder's equity upon termination, but his affidavit did not effectively dispute the valuations provided by Fox and Carter. The court noted that Dr. Hubbell's general statements regarding fair market value lacked specificity and did not counter the evidence presented. The appeal that followed stemmed from this grant of summary judgment, emphasizing that such judgment is appropriate when no genuine issues of material fact exist, with the burden on the moving party to demonstrate this absence.
Summary judgments in Tennessee lack a presumption of correctness on appeal, necessitating a fresh determination of compliance with Tenn. R. Civ. P. 56. The court evaluates evidence favorably for the non-moving party and identifies any factual disputes. If disputes exist, their materiality to the claim or defense is assessed to determine if they warrant a trial. A party may obtain summary judgment only if the evidence demonstrates no genuine issues of material fact, entitling the moving party to judgment as a matter of law. The moving party bears the burden to prove the absence of genuine material facts, which can be achieved by negating essential elements of the nonmoving party's claim or demonstrating that the nonmoving party cannot prove such elements at trial. Should the moving party meet this burden, the nonmoving party must then provide specific evidence of material factual disputes, which may include highlighting overlooked evidence, rehabilitating challenged evidence, presenting additional evidence, or submitting an affidavit for further discovery needs.
Additionally, the Tennessee Professional Corporation Act governs the operation of professional corporations, including the acquisition and transfer of shares. Upon a shareholder's termination, the professional corporation must acquire the shares at a price deemed to represent fair value as of the termination date. If a price is predetermined in the corporate charter or agreed upon by all parties, that price prevails; otherwise, the corporation must make a written offer based on its assessment of fair value.
The corporation is required to provide specific financial documents when making a written offer to a shareholder, including the balance sheet, income statement, and any interim financial statements from the fiscal year ending no more than sixteen months before the offer. The obligation to make this offer and deliver the financial documents rests with the corporation. In this case, SAA did not fulfill this requirement, prompting Dr. Hubbell to initiate legal action to ascertain the fair value of his shares under Tennessee law (Tenn. Code Ann. 48-101-615). In such proceedings, the court is tasked with determining fair value and may appoint an appraiser to assist. The shareholder is entitled to a judgment reflecting the fair value of their shares as of their employment termination date, along with interest.
Several precedents inform the fair valuation process for closely held corporations, indicating that appraisals involve various considerations and are not strictly formulaic. Notably, cases like Spivey v. Page underscore the significance of a professional corporation's ability to generate revenue, while Pelot v. Cakmes illustrates the combination of multiple valuation methods. York v. York emphasizes the inclusion of "corporate goodwill" in valuations. The appraisal process is characterized as factually driven, requiring comprehensive evidence evaluation. Under the Delaware Rule, the court has the final say on the relative weight of the valuation methods applied. The court's summary judgment was based on its finding of no material factual dispute, as the affidavits presented did not satisfactorily counter each other.
Dr. Hubbell's affidavit challenged the Fox and Carter affidavits, asserting they did not accurately reflect the fair value of his shares, which should include various factors such as contract rights, accounts receivable, tangible property, intellectual property, goodwill, and market conditions. The trial court incorrectly concluded that this did not present a genuine issue of material fact. To counter SAA’s motion for summary judgment, Dr. Hubbell needed to demonstrate a factual dispute regarding the valuation by SAA, which he achieved by submitting additional evidence. A material fact is defined as one that affects the resolution of the substantive claim or defense, while a genuine issue exists if a reasonable jury could favor one party. The court must view evidence favorably towards the non-moving party. Dr. Hubbell's affidavits and additional facts raised legitimate concerns about whether SAA’s valuation considered all relevant elements.
The court's reliance on the Delaware Block Method for determining share value involves evaluating three primary approaches: market value, asset value, and investment value. The method's application depends on the business type and objectives. Counsel for Dr. Hubbell indicated that more discovery was necessary to establish fair value, but the trial court granted summary judgment based solely on stockholder’s equity, neglecting other factors necessary for a fair valuation. Additionally, there was an unresolved factual dispute regarding whether Dr. Hubbell owned 20 or 29 percent of SAA shares at termination, which must be clarified for an accurate fair value determination. Consequently, the trial court's grant of summary judgment was erroneous, and the case is remanded for further proceedings. Costs of the appeal are assigned to the Appellees.
