COX ENTERPRISES, INC., a Delaware corporation, Plaintiff - Appellant,
NEWS-JOURNAL CORPORATION, a Florida corporation, HERBERT M. DAVIDSON, JR., MARC L. DAVIDSON, JULIA DAVIDSON TRUILO, JONATHAN KANEY, JR., SERVICE, et al., Defendants -- Appellees, PENSION BENEFIT GUARANTY CORPORATION, Claimant -- Appellee
Appeal from the United States District Court for the Middle District of Florida. D.C. Docket No. 6:04-cv-00698-JA-DAB.
For COX ENTERPRISES, INC., a Delaware corporation, Plaintiff - Appellant: John A. DeVault III, Bedell Dittmar DeVault Pillans & Coxe, Jacksonville, FL; Jason Todd Burnette, Peter Canfield, James Ronald Williams Jr., Jones Day, Atlanta, GA; Roberta Ann Colton, Trenam Kemker, Tampa, FL; Gary M. Ford, Groom Law Group, Chartered, Washington, DC; Lesli Nicole Gaither, Dow Lohnes, PLLC, Atlanta, GA; Courtney K. Grimm, The Bedell Firm, Jacksonville, FL; Edward J. Meehan, Groom Law Group, Chartered, Washington, DC.
For NEWS-JOURNAL CORPORATION, a Florida corporation, Defendant - Appellee: Katie Lee Dearing, The Dearing Law Firm, PA, Jacksonville, FL; Bruce A. Hanna, Cobb & Cole, PA, Daytona Beach, FL; Rutledge R. Liles, Liles Gavin Costantino George & Dearing, PA, Jacksonville, FL.
For Herbert M. Davidson, Jr., Defendant - Appellee: Bruce A. Hanna, Cobb & Cole, PA, Daytona Beach, FL.
For Marc L. Davidson, Julia Davidson Truilo, Defendants - Appellees: Michael L. Chapman, Robert W. Lang, Holland & Knight, LLP, Tampa, FL; Bruce A. Hanna, Cobb & Cole, PA, Daytona Beach, FL.
For Jonathan Kaney, Jr., Defendant - Appellee: Bruce A. Hanna, Cobb & Cole, PA, Daytona Beach, FL.
For Pension Benefit Guaranty Corporation, Defendant - Appellee: Colin B. Albaugh, Julia Davidson Truilo, Pension Benefit Guaranty Corporation, Office of the Chief Counsel, Washington, DC.
For Stuart D. Ames, Amicus Curiae: Bradford Swing, FordHarrison, LLP, Melbourne, FL.
For Service: Darryl M. Bloodworth, David P. Hathaway, Dean Mead Egerton Bloodworth Capouano & Bozarth, PA, Orlando, FL; Carol Connor Cohen, Arent Fox, LLP, Washington, DC; Kristen L. Davenport, Attorney General's Office, Daytona Beach, FL; Mayanne Downs, GrayRobinson, PA, Orlando, FL; David L. Evans, Mateer & Harbert, PA, Orlando, FL; Kelly B. Holbrook, Broad & Cassel, Tampa, FL; David Bilbrey King, King Blackwell Zehnder & Wermuth, PA, Orlando, FL.
For James J. Hanks, Jr., Amicus Curiae: Bradford Swing, FordHarrison, LLP, Melbourne, FL.
Before ED CARNES, Chief Judge, JILL PRYOR and HIGGINBOTHAM,[*] Circuit Judges.
This litigation has a long history in the Eleventh Circuit. In this latest chapter Cox Enterprises and Pension Benefit Guaranty Corporation (PBGC) do battle for what remains of the now-defunct newspaper publisher News-Journal Corporation (NJC). This case arises at the intersection of Florida's election-to-purchase statute and its distributions-to-shareholders statute. The election-to-purchase statute affords a corporation faced with a derivative suit the option to purchase the shares of the complaining shareholder in order to cause dismissal of the suit. The distributions-to-shareholders statute generally forbids a corporation from reacquiring shares by distribution if such distribution would render the corporation insolvent. Cox brought a derivative
suit against NJC. NJC, in turn, elected to purchase Cox's shares. But at no time could NJC reacquire Cox's shares without rendering itself insolvent. As a consequence, NJC never made a distribution to Cox and Cox never relinquished its shares. Although at all times a shareholder, Cox attempts to prosecute its claim as a creditor of the now-defunct company.
A prior panel of this court instructed the district court to determine whether distribution of NJC corporate assets to Cox, a shareholder, would render NJC insolvent and, if so, to direct NJC to pay PBGC, a creditor, before distributing any assets to Cox. On remand, the district court heeded this court's instruction. We are now asked to reconsider the prior panel's holding and the district court's application of it.
We relate facts aptly stated in this court's 2007 and 2012 decisions, supplementing as necessary. Eugene C. Pulliam organized NJC in 1925 when he acquired and consolidated two small Daytona Beach newspapers into a single newspaper, the Daytona Beach News-Journal. Pulliam paid cash for one of the acquired newspapers and granted a 40% interest in NJC for the other, owned by T. E. Fitzgerald. NJC had one class of common stock with 4,000 shares issued and outstanding. In 1927, Pulliam sold his 60% interest to Julius and Herbert Davidson, giving the Davidson family a majority of NJC's shares. Over the ensuing decades, Fitzgerald's minority 40% interest changed hands until, in 1963, the minority in NJC from a member of the Davidson family, leaving him with 47.5% of NJC's outstanding shares. In 1969, Perry sold his minority interest to Cox, a privately held media conglomerate. Cox has maintained the 47.5% interest comprising 1,900 shares in NJC. The remaining 2,100 shares, which comprise a controlling 52.5% interest in NJC, are now owned by a closely held corporation controlled by the Davidson family.
Cox I set out the more recent history of NJC's corporate activities:
[When this case began,] NJC's directors were Tippen Davidson, Marc Davidson, Julia Davidson Truilo, Robert Truilo, Georgia Kaney, Jonathan Kaney, Jr., and David Kendall. Tippen Davidson also served as the president and CEO of NJC until his death in January 2007. Tippen Davidson's grandfather, Julius, served as the News--Journal' s publisher from 1927 until 1962, when he relinquished control of the paper to his son Herbert M. Davidson. Herbert published the paper until his death in 1985. Under Julius and Herbert's leadership, NJC also owned and operated a radio station, WNDB--FM, from 1944 to 1972.
Although Tippen Davidson enjoyed a brief career as a professional musician, he eventually returned to Daytona Beach to work as a reporter and city editor for the News--Journal. Upon his father's death, he became the paper's general manager and publisher. Tippen's wife, Josephine, has also worked as a reporter and editor at the News--Journal. Their two children, Marc Davidson and Julia Davidson Truilo, are currently members of the News--Journal staff and the NJC board of directors. Julia's husband, Robert Truilo, serves on the board of directors and as the News--Journal 's business manager.
In his capacity as CEO of NJC, Tippen Davidson continued to pursue his interest in music and the performing arts. As early as 1966, he began to help create
several non-profit organizations, including the Florida International Festival (" FIF" ), Central Florida Cultural Endeavors (" CFCE" ), Seaside Music Theater (" SMT" ), and Lively Arts Center, Inc. (" LACI" ) (collectively " Cultural Entities" ). SMT, in particular, has consistently depended on funding from NJC. After NJC pledged $1.8 million to SMT in 1993, NJC management developed a " spin-off strategy" according to which contributions to SMT would go down by $180,000 annually until they totaled no more than $500,000 per year. The strategy was never effectively implemented, and, in fact, in 1999, NJC's total contribution to SMT came to $1.4 million. By the following year, this figure had risen to $1.8 million--triple what it had been eight years before.
In 1996, NJC's directors organized LACI as a part of the SMT spin-off strategy. Tippen, Georgia Kaney, Marc Davidson, and Julia Truilo served as its original board of directors. Their goal was to build and operate an independent and upscale performing arts center for SMT, thereby enhancing the stature of SMT and increasing its revenue. The projected cost for the center was $29 million. NJC provided $13 million of this amount as part of a naming rights agreement.
In the beginning, NJC treated its contributions to the Cultural Entities as charitable tax deductions. Over time, however, the donations began to exceed the maximum allowed for charitable deductions. Accordingly, in 1993, NJC began to classify its contributions as business expenses for the purpose of corporate promotion. The district court found these cultural expenditures to have been waste . . .
Cox first learned of the $13 million naming rights agreement on 10 March 2004. Unsatisfied with the explanations for this expenditure provided by NJC, Cox filed suit on 11 May 2004, alleging various acts of fraud, waste, and mismanagement.
In response to Cox's suit, NJC elected to purchase all shares owned by Cox at fair value pursuant to Florida's election-to-purchase statute, which allows a corporation or one or more of its shareholders to purchase the shares of a petitioning shareholder at fair value in order to cause dismissal of the suit.
Because the parties could not agree on the fair value of Cox's shares, the statute required the district court to determine their fair value " as of the day before the date on which [Cox's suit] was filed."  Along with the News-Journal newspaper, NJC had one wholly-owned subsidiary, Volusia Pennysaver, Inc. The district court held an eight-day bench trial during which both sides presented expert testimony regarding value and valuation methodology
as to both entities. The district court accepted the valuation for Pennysaver proffered by Cox's valuation expert and valued Pennysaver at $36 million. The district court also adopted the cash-flow analysis for the News-Journal proffered by Cox's valuation expert with minor modifications, premised on several conclusions: first, that NJC was a marketable corporation--that its shares would command an attractive price on the open market; second, that the News-Journal had experienced " abnormally poor performance relative to comparably situated newspapers" as a result of mismanagement; and third, that proper valuation of NJC as a going concern required normalization of " the financial data of a poorly operated corporation before determining what the corporation would sell for in an arm's-length transaction."  To this third point, related to normalization, although the News-Journal at that time had an actual EBITDA margin of 9.3%, the district court applied a normalized EBITDA margin of 24.8% according to the EBITDA margins of similarly situated newspaper corporations not subject to mismanagement. Based on the News-Journal' s 2004 gross revenue of approximately $66 million, the cash-flow analysis yielded a value of $236 million for the News-Journal  which, when combined with the $36 million valuation for Pennysaver, resulted in an overall valuation of $272 million for NJC. Correspondingly, the district court valued Cox's 47.5% interest in NJC at $129.2 million.
At the end of its thorough memorandum and order setting the fair value of Cox's shares, the district court requested memoranda from the parties regarding " what would constitute reasonable terms of purchase"  given the valuation. Both NJC and Cox abided the court's request. In its memorandum to the court, NJC indicated that " the amount necessary to complete the purchase [was] approximately twice the amount that NJC [could] finance and pay while continuing to operate its newspaper ...