Boston Properties to develop the company's real estate. Px 21 at 6.
Prior to the 1981 appraisal, the record strongly suggests that the substance of U.S. News' development activities was never submitted to American Appraisal. According to David Marshall, who prepared the 1978-1980 reports for American Appraisal, although Mr. Sweet told him that U.S. News was "sitting on a gold mine," Marshall Dep. at 475; see Px 77 at 5383, U.S. News did not disclose the Carr study, the Studley appraisal, or the Arnold & Porter summary. Id. at 496-98, 503, 622-23. Marshall testified that this information would have been relevant to the stock appraisals. 496-502, 506, 624-27. Mr. Naimoli, a member of the Board and a defendant in this action, has stated that he offered Marshall a copy of the Arnold and Porter summary. Naimoli Dep. at 227-29.
The 1981 appraisal by American Appraisal reflects that these development plans substantially increased the value ascribed to U.S. News' land holdings. A major portion of this increase results from differing interpretations about the land available for development in various years. For instance, the 1980 appraisal found that the land available for development -- the land excess to business -- was worth $ 4.6 million, Px 20 at 13, and only a discounted value of $ 1.9 million was included in valuing the stock. In contrast, the 1981 appraisal showed an estimated $ 37.5 million value for all of U.S. News' real estate holdings included in the joint venture, discounted to a net value of $ 16 million. Px 21 at 22, 27.
The significance of these development plans to the value of U.S. News' real estate holdings is illustrated by a comparison of the per square foot values assigned by American Appraisal in 1980, and the estimates prepared by Julien Studley in the same year. American Appraisal calculated the value of the real estate at $ 140 per square foot, Px 20 at 13; Notes, Px 95 at 4, while Studley estimated the value of the land in a range between $ 180 and $ 320 per square foot, depending on the use of the property. The significance of this exponential increase in the land values is also reflected in American Appraisal's valuation of U.S. News' stock. The per share value tripled from $ 152 in 1980, Px 20 at 14, to $ 470 in 1981. Px 21 at 31. If the higher real estate values had been incorporated in the stock appraisals earlier, they would have had a significant impact on the value of the employees' stock interests.
American Appraisal applied a variety of discounts to the values it determined for U.S. News' stock. For instance, these values were discounted to reflect the limited market for the shares of stock of a close corporation such as U.S. News. American Appraisal's expert has asserted that while "the appropriate discount depends upon the circumstances peculiar to a particular stock, " Megna Aff. at para. 19, "marketability discounts should always be at least 10%." Id. at para. 20. The plaintiffs contend that any marketability discount was inappropriate because U.S. News retained the option to repurchase these shares, an option which it unfailingly exercised every year. Thus, a ready resale market was always available for the shares.
At least one authority would appear to favor the plaintiffs' view. See Pratt, S., Valuing a Business: The Analysis and Appraisal of Closely-Held Companies (1981). Pratt discusses the appropriateness of a marketability discount for shares held by an employee stock ownership plan (ESOP). Pratt concludes that although a marketability discount is usually appropriate, where
some companies have a policy of redeeming ESOP shares for cash when tendered, . . . where management indicates an intention to continue such a policy, and where the company's financial position appears capable of supporting it, it would seem that a zero marketability discount would be justifiable.