Smith and Irvine Co. Approach End of Long and Winding Road : Court to Decide Value of Heiress’s Landholdings

It’s high noon for Joan Irvine Smith, the feisty 54-year-old heiress whose business career is chronicled by the legal battles she has waged against the management of the Irvine Co.

For Smith, one of the nation’s more wealthy and colorful businesswomen, the showdown will come at a trial that begins Aug. 4. It will determine the amount of money she and her mother will receive for their remaining 11% interest in the huge real estate development firm that owns 68,000 acres, or about one-sixth of all the land in Orange County.

The stakes are high. Donald L. Bren, chairman and primary owner of the Irvine Co., says he is willing to pay Smith and her mother, Athalie Clarke , $88 million for their stock. They are demanding at least $303.5 million, plus interest back to November, 1983.

“All we are talking about is money--dollars and cents,” Smith said. Irvine Co. spokesman Larry Thomas said it would be “inappropriate” for company officials to speculate about what would happen to the development concern should Smith prevail in court. While he acknowledged that “any payment in the hundreds of millions will cause discomfort,” he added, “we don’t expect it would lead to layoffs or that it would significantly affect our planned activities.”

Still, the trial marks Smith’s departing volley at the Irvine Co. After 30 years of fighting to protect what she considered her family legacy--the stock she inherited from her grandfather, James Irvine II--Smith has decided that she can no longer be part of a company that is controlled by Bren. Her concern is that she and her mother get top dollar.

Smith’s legal challenge is similar in some respects to her objection a decade ago to an offer from Mobil Oil Corp. to buy the Irvine Co.’s stock for $201 million. In 1977 she sued to block that sale, while she joined a consortium of business people, including Bren, who jumped into the bidding and finally bought the company for $337.4 million.

At issue in the upcoming trial is the market value of the Irvine Co. as of Nov. 13, 1983, the day before which the Irvine Co. was merged--over Smith’s protests--into a holding company owned by Bren.

Bren contends that the Irvine Co. was worth $1 billion at that time, reflected in the price he paid to purchase the stock of 34 other Irvine Co. shareholders. The company said it hired experts--including the New York investment banking concern of First Boston Corp.; Lexecon, an economic consulting company, and Real Estate Research Corp., a real estate appraisal firm--that will testify as to the fairness of the company’s valuation of its stock.

By contrast, Smith, rejecting Bren’s 1983 offer as outrageously low, says her privately commissioned appraisals of the company concluded that its November, 1983, value was at least $2.75 billion.

In the end a judge will determine whether Bren’s 1983 stock purchase occurred in open market conditions and therefore represents a fair price for the company or, in the alternative, which of differing “expert appraisals” proffered by the Irvine Co. and Smith best represents the company’s true market value. Or he could choose a compromise price.

The start of the trial in Michigan, where the Irvine Co. is incorporated, follows years of preparation. The Irvine Co. said that before the trial is over, it will have spent $5 million in legal fees. Smith similarly estimates her costs in “the millions.”

The trial may take six months, with 45 witnesses expected to testify. Because the case is so time consuming, it has been assigned to a retired judge, Robert Webster, who will act as a referee. His decision will probably be appealed, and it could take years for a final resolution.

Makeshift Court Room

William Campbell, 50, a senior partner and head of the litigation department at the Los Angeles-based law firm of Paul Hastings Janofsky & Walker, will represent Bren and the Irvine Co. Howard Friedman, 59, senior partner in the Los Angeles law firm of Loeb & Loeb, will represent Smith and her mother. Friedman has been handling Smith’s lawsuits against various management regimes at the Irvine Co. since 1957.

Because of the lengthy trial, the attorneys will present their cases in a makeshift court room established in an office building in the wealthy north Detroit suburb of Bloomfield Hills. The proceedings will be conducted under authority of the Oakland County Court.

Campbell said the case could be a legal trailblazer in Michigan, where he said there has been little precedent for determining fair market value of a privately held company.

Irvine Co. executives said they believe that the “market value” of the company was established by shareholders who accepted Bren’s April, 1983, offering price of $200,000 per share for their stock, which was based on a total corporate market value of $1 billion.

The selling shareholders, the Irvine Co. emphasizes, included such hardball businessmen as Detroit shopping center mogul Alfred Taubman; Herbert Allen, a prominent New York investment banker; Max Fisher, a retired oilman and former chairman of United Brands Co.; retail entrepreneur Milton Petrie; and automobile baron Henry Ford II.

Reasons for Selling Shares

These men, Irvine Co. officials say, are not accustomed to leaving $1 on the bargaining table, much less $2 billion--the amount by which Smith contends the company was undervalued. In the past, Taubman, leader of the consortium that bought the Irvine Co. in 1977, said he sold his shares because the price was attractive. He could not be reached last week for further comment.

Friedman, in retort, says that Taubman sold his shares in part because he did not want to remain a business partner with Bren and that others who sold their interest in the Irvine Co. did so for estate planning purposes.

While Campbell has some of the sellers, including Taubman, Fisher and Allen, on the Irvine Co.’s witness list, Friedman has named others, including Ford and Petrie, among the witnesses for Smith’s case.

Friedman said his key argument will be that the Irvine Co., as a privately held company, “has never had an open market for its shares” and that for whatever private reasons the other shareholders accepted Bren’s price, that price did not represent the company’s full value. “It does not represent the interplay of multiple buyers and multiple sellers,” he said.

Friedman said that deriving the true value of the Irvine Co. is a complicated process he has been working on for four years. The complexity, he said, stems from the widely diverse properties and operations of the Irvine Co., which is in retail, residential, office and industrial development.

Underlying Assets

Friedman said he is evaluating the Irvine Co. “as a going concern, giving considerable emphasis to the value of its underlying assets,” which he described as principally its developed and undeveloped property. He said Smith has had several appraisals made and has computerized “thousands and thousands” of business documents provided by the Irvine Co.

Smith’s position, he said, is that the Irvine Co.’s land in 1983 was worth $3 billion. After subtracting the company’s debts, he figures that the corporation’s market value is at least $2.75 billion.

When Smith first protested Bren’s offering price for her stock, her lawyers had estimated that the Irvine Co. was worth between $1.5 billion and $2 billion. But Friedman said that was before the Smith-hired appraisers had finished their job.

That was also before the Irvine Co.’s tangle with Orange County Tax Assessor Bradley L. Jacobs, who ruled that Bren’s purchase of a controlling block of Irvine Co. stock in 1983 constituted a real estate purchase and triggered a mandatory reassessment of the Irvine Co.’s property under provisions of Proposition 13, the property tax limiting initiative approved by California voters in 1978.

Using that rule, Jacobs placed the assessed value of the Irvine Co.’s land at $3.6 billion. The company, initially contending that the land was worth no more than $1 billion, ultimately agreed to an out-of-court settlement that set the value of its landholdings at $2.95 billion in April, 1983, when Bren acquired control of the company.

Attorneys for both sides are expected to ask the judge on Monday to decide whether the Orange County tax assessor’s appraisal may be used in determining the company’s market value. The Irvine Co.’s counsel will urge that the appraisal be excluded from the trial, while Smith’s will argue its relevancy.

Objects to Appraisal

Campbell objects that the Orange County tax assessor’s appraisal of Irvine Co. property relies on a “parcel by parcel” valuation of the land, which he says would be deeply discounted were it all sold simultaneously on the market. He also noted that under California law, tax appraisals are not admissible in court to determine market value. But Michigan law differs, Friedman says.

While Bren was willing to pay Smith $114 million--or $208,400 per share--for her stock in November, 1983 (adjusted up from $200,000 a share to reflect a 4% appreciation in Orange County real estate between April and November of that year), Campbell said the company’s offering price to Smith today has fallen to $88 million.

Campbell said it is customary for buyers of stock to reduce their price once they have obtained a controlling interest in a firm. He added that studies commissioned by the Irvine Co. indicate that the stock price offered for control of a company is typically inflated by 30% and then reduced to acquire the stock of remaining shareholders.

Campbell said the Irvine Co. intends to prove that Smith “acted arbitrarily and unreasonably” in rejecting the earlier $114 million offer for her stock--as well as by rejecting other options that included opportunities to double her ownership in the company from 11% to 22% or to sell her shares on the open market.

Therefore, the company maintains that when the Michigan courts determine a fair price for Smith’s stock, she should be denied any interest which would have accrued since 1983 and she should be be required to reimburse the company for attorneys’ fees and other court expenses, Campbell said.

Gary Hunt, Irvine Co. vice president, said Bren, who has shied from the press, will testify in the court hearings and has agreed to talk to reporters during the trial. “I think he feels pretty strongly he is right in this case,” Hunt said.

Try Case in Press

Smith, protesting that she does not want to “try this case in the press,” said the Irvine Co. is making a last-minute play for a settlement by trying to discourage her with arguments presented in newspaper interviews. “They are trying to get a cheap settlement out of me,” she said.

Campbell denied the allegation and said neither Smith nor the Irvine Co. has made any settlement offer.

Smith said she has always felt that the Irvine Co.’s officers and directors have understated the value of the firm’s huge real estate empire. She said she proved that point in 1977 when she sparked a bidding war for the company that sent its price soaring to $337.4 million. Were it not for her suit, the company would have been sold to Mobil Oil Corp. for $201 million.

Since joining the Irvine Co. board of directors 30 years ago as the only female member, she said she has learned that “When you are a woman, they (business colleagues) don’t take you seriously.”

“I had to have a little business savvy,” said Smith, recalling the victory that enabled her, at least temporarily, to keep a foothold in the Irvine Co. by joining the buying group known as Taubman-Allen-Irvine. Smith and her mother sold their 22% interest in the Irvine Co. to TAI for $72 million, or $40.10 a share, and then used $3.3 million of the proceeds to acquire 11% of the TAI stock for $6,000 a share.

High Return on Equity

Irvine Co. officials say the 34 shareholders who sold their interest in the Irvine Co. to Bren in 1983 realized a 3,363% return on equity since 1977. Smith and her mother are demanding almost three times the price received by the other shareholders, which the company says would represent about a 10,000% return on their equity investment in 1977.

Smith’s demand, Irvine Co. officials say, contrasts sharply with only a 34.18% increase in company revenues and a 14.5% increase in company earnings from 1977 to 1983, during which time they say the company’s profit margin declined by 14.63%.

But Smith contends that the $337.4 million TAI paid for the Irvine Co. in 1977 was far below the company’s true value at the time. She says the nonprofit foundation formed by her grandfather to run the Irvine Co. after he died in 1947 did not get the best price for the company because it discouraged competitive bidding in an attempt to favor Mobil. “We always suspected there was a sweetheart deal,” Friedman said late last week.

Campbell, however, said he will argue that the price TAI paid for the Irvine Co. in 1977 was judged fair by the Orange County Superior Court.

Preserving Roots

Smith, long at odds with the foundation’s management of Irvine Co. business, previously had lobbied successfully for a change in the federal tax code that forced the foundation to divest its control of the company. But the foundation’s proposed sale of the Irvine Co. to Mobil was designed in a way that Smith said would have forced her out of the company. At the time she said she was engaged in a struggle of principle to preserve her family roots.

Ironically, Bren was a member of the bidding group that Smith ultimately joined to buy the Irvine Co. from the foundation and thus avert the sale to Mobil. In retrospect, Smith says it was a mistake for her to become a business partner of Bren. “It is too bad, it just didn’t work out,” she said. “That’s what they put erasers on pencils for.”

That’s also why there are courts. In October, 1983, Smith filed a $5-billion damage suit seeking to block Bren’s merger plan that was intended to enable the Irvine Co. to assume the $560 million in debts that Bren previously had incurred when he boosted his ownership in the Irvine Co. from 34% to 86%.

When Orange County Superior Court Judge Phillip A. Petty denied Smith’s request for an injunction, Irvine Co. officials were jubilant. Smith, in turn, decided that she at last wanted to sever her relationship with the Irvine Co. because she believed that it had become dangerously debt-ridden.

18-Hour Workdays

Since 1977 Smith said she has not left California even to visit her home and horse farm in Virginia. She said she regularly puts in 18-hour workdays trying to monitor the Irvine Co. “I want to see that Donald (Bren) does not dissipate the assets of this company before we get paid,” she said.

Smith and her attorneys attend meetings of the Orange County Board of Supervisors, the Municipal Water District of Orange County , the Irvine Ranch Water District and the Santa Ana City Council. She then sends summaries of the meetings to Bren and members of the various government agencies.

At the moment it is uncertain whether Smith will testify at the trial in Michigan. Although in 1977 Smith attended the trial on the proposed Mobil sale every day, she said that during the upcoming trial she has no intention of leaving Orange County. “I will be right here,” she said.

Smith said she is tired of playing watchdog to protect her financial interests, and that is the real reason she and her mother are anxious to get out of the Irvine Co. “I want to be master of my own destiny,” she said. “I’d like to have the money in the bank and not have to worry about it.”