Right of First Refusal – Fair Market Value

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WI Court of Appeals – District II

Case Name: Country Visions Cooperative v. Archer-Daniels-Midland Company, et al.

Case No.: 2018AP960

Officials: Neubauer, C.J., Gundrum and Davis, JJ.

Focus: Right of First Refusal – Fair Market Value

A right of first refusal (ROFR) is an agreement in which an owner of property (typically real estate) conveys a right to another party to match any offer made for the property. If the ROFR holder matches the offer, any sale must be to the holder. See MS Real Estate Holdings, LLC v. Donald P. Fox Family Trust, 2015 WI 49, ¶24, 362 Wis. 2d 258, 864 N.W.2d 83 (an ROFR “is a contractual right to be first in line should the opportunity to purchase or lease a property arise”).

Ordinarily, exercise of such a right is straightforward—the property owner receives an offer from a prospective buyer which it wishes to accept and communicates that offer to the ROFR holder, who then has a certain period of time to match it. Whether and how the right applies becomes more involved, however, when the property owner wishes to sell the property as part of a larger parcel or, as in this case, as part of a sale of multiple parcels in a single transaction. In these circumstances, Wisconsin precedent requires that the transaction be scrutinized to determine what portion of the purchase price is properly allocable to the property subject to the ROFR. Wilber Lime Prods., Inc. v. Ahrndt, 2003 WI App 259, ¶¶11-14, 268 Wis. 2d 650, 673 N.W.2d 339. That allocated portion becomes the price at which the ROFR may then be exercised as part of a specific performance remedy. Id., ¶¶12-13. Wilber Lime holds that in the event of a dispute on this point, the exercise price should be determined based on the subject property’s actual “fair market value” (as opposed to a more formulaic, pro rata approach adopted in some jurisdictions, based on the percentage of acreage the subject parcel bears to the whole). Id., ¶¶8-14.

The proper application and breadth of that holding is at the heart of this appeal. Here we must apply Wilber Lime to a case involving some complicating twists, starting with the fact that the property owner, Archer-Daniels-Midland Company (ADM), and the offer single $25 million “package deal” for that parcel, three other parcels, and accompanying business assets. We say “purportedly” because the ROFR holder, Country Visions Cooperative (Country Visions), alleged at trial, and the trial court agreed, that the claimed standalone nature of this sale was a sham—that in reality ADM and United agreed to an artificially inflated “standalone” price of $20 million for the property after learning of, and in order to defeat, Country Visions’ ROFR, while tying this sham sale to a collective sale of the other three parcels and all business assets at an artificially deflated price of $5 million. or, United Cooperative (United), (collectively, Defendants), purportedly carved out the sale of the subject parcel into a separate, standalone transaction after Defendants had initially negotiated a single $25 million “package deal” for that parcel, three other parcels, and accompanying business assets. We say “purportedly” because the ROFR holder, Country Visions Cooperative (Country Visions), alleged at trial, and the trial court agreed, that the claimed standalone nature of this sale was a sham—that in reality ADM and United agreed to an artificially inflated “standalone” price of $20 million for the property after learning of, and in order to defeat, Country Visions’ ROFR, while tying this sham sale to a collective sale of the other three parcels and all business assets at an artificially deflated price of $5 million.

Application of Wilber Lime’s specific performance remedy leads to a second twist. Unwinding the sham $20 million sale required a judicial determination as to the appropriate price at which the ROFR could be exercised. In this case, that meant considering evidence that the buyer was uniquely situated to put the property to a specific use, and therefore incentivized to pay more than “fair market value” as measured by traditional appraisal methods. In other words, Defendants argued (while still denying there was any sham sale in the first place) that in a bona fide standalone transaction United would have paid considerably more than the property’s “appraised” value. That is because United would be able to create an income stream with this parcel that few if any other buyers, including Country Visions, could duplicate. The trial court accepted this argument, resulting in a judicially determined price of $16.6 million, coupled with a new fifteen-day offer period for Country Visions to match it (currently stayed pending this appeal). That price was lower than the $20 million offer price that the trial court found was a sham, but higher than the price generated by appraisal methods chiefly designed to measure fair market value in the absence of an actual buyer.

Application of Wilber Lime’s specific performance remedy leads to a second twist. Unwinding the sham $20 million sale required a judicial determination as to the appropriate price at which the ROFR could be exercised. In this case, that meant considering evidence that the buyer was uniquely situated to put the property to a specific use, and therefore incentivized to pay more than “fair market value” as measured by traditional appraisal methods. In other words, Defendants argued (while still denying there was any sham sale in the first place) that in a bona fide standalone transaction United would have paid considerably more than the property’s “appraised” value. That is because United would be able to create an income stream with this parcel that few if any other buyers, including Country Visions, could duplicate. The trial court accepted this argument, resulting in a judicially determined price of $16.6 million, coupled with a new fifteen-day offer period for Country Visions to match it (currently stayed pending this appeal). That price was lower than the $20 million offer price that the trial court found was a sham, but higher than the price generated by appraisal methods chiefly designed to measure fair market value in the absence of an actual buyer.

Both sides appeal these findings, along with other rulings we will address in the course of this decision. With one exception that may or may not prove significant, we affirm the trial court. We find that the trial court did not err in finding the purported standalone $20 million sale a sham. Nor did the court err in fashioning a specific performance remedy that considered United’s heightened economic incentives, to arrive at a price that best approximated the offer United would have made in a true standalone sale. We cannot, however, fully accept the exercise price found by the trial court. This is because it is not clear from the trial court’s decision, or from the testimony and other evidence in this record, that the exercise price reflected only the value of the real estate that is the subject of Country Visions’ ROFR or whether it also included non-real estate-related business assets that were not part of the real property to which the ROFR is limited.

Remand is thus necessary to ensure that the ROFR exercise price is based on an “apples-to-apples” comparison. That is, the trial court should determine whether the price at which it decided Country Visions can exercise its ROFR is based only on the value of the real property and, if it is not, what portion of that price is properly allocable to the real property. Further fact-finding may impact the trial court’s denial of compensatory damages as well, since that denial was tied to its decision on the exercise price.

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Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.