Valuing Minority Interests In Closely-Held Businesses .
Valuing Minority Interests inClosely-Held Businesses – TheBusiness Judgment Rule, FiduciaryDuties and Reasonable Expectations2321 N. Loop Drive, Ste 200 Ames, Iowa 50010www.calt.iastate.eduJune 27, 2014- by Roger A. McEowenIn the Iowa case,3 a minority shareholder (whowas a lawyer that helped draft the corporateformation documents and later a buy-outprovision) wanted the corporation to buy-out hisinterest. But, he never invoked a 1984 buy-outprovision that was adopted at his request.Instead, he demanded that his interest be boughtout at a price that he deemed acceptable. Themajority shareholders attempted to negotiatewith the minority shareholder in good faith, butthe parties couldn’t agree on the “process” forvaluing the shares that the minority shareholdercould agree to before he sued for “oppression.”While the minority shareholder neverestablished that the majority breached anyfiduciary duties with respect to the shareholder,and the corporation was operated in an efficientmanner that dramatically increased its value(and, hence, the value of the minorityshareholder’s stock interest), the minorityshareholder claimed that the majorityundervalued his interest by taking into account aminority interest discount and never paying hima dividend. That, the minority shareholderclaimed, constituted oppression, and he suedseeking an order that either the corporation bedissolved or that his shares be bought-out at fairmarket value.OverviewMinority shareholders in a small, closely-heldcorporation are in a precarious position. Theyhave no control over management of thecorporation and, for example, can’t forcedividends to be paid or force a corporateliquidation. Clearly, corporate directors(including those acting as directors) owe afiduciary duty to the corporation with respect totheir actions as directors, and those fiduciaryduties apply in the context of directors’ abilitymanage the closely-held business within theirdiscretion. At the same time, corporate directorsthat control the closely-held corporation cangenerally use their business judgment to operatethe business as they deem appropriate, butdirector conduct that is not consistent with thehonest, good faith, exercise of businessjudgment and discretion could be deemed to be“oppressive” to minority shareholders.1Over the past year, two state-level SupremeCourt decisions highlight the different views thatcourts take concerning controlling shareholderconduct that is claimed to be “oppressive” to theminority shareholder(s).2 Clearly, the decisionspoint out that a well-drafted buy-sell agreementcan go far in protecting the rights of minorityshareholders in closely-held corporations.Two brothers formed the closely-held farmcorporation in 1966. The purpose of forming thecorporation was to keep the land in the familyand to facilitate succession of the farmingoperation to family members interested inThe Iowa Case1
farming. Only one of the brothers had a son whowanted to farm, so that brother’s estate plan wasdrafted such that the son would receive majoritycontrol of the business. That son became thedefendant (along with the corporation) in thiscase. The other brother initially owned 48.49percent of the corporation and his interestultimately passed (or was gifted) to his two sons,one of which was the plaintiff in this case whoreceived a 26.29 percent interest. Ultimately,majority control passed to the on-farm heir uponthe death of the founding brother that hadmajority control. Eventually, the plaintiff’snephew took over as farm manager in 2005.amended bylaws (which were amended at hisrequest) by offering his shares to the corporationor other shareholders for acquisition at bookvalue. As a member of the Board of Directors,he was aware of the restrictions on sale of hisstock and testified at trial that he believed therestrictions were reasonable.6Negotiations concerning a buy-out of theminority shareholder’s stock occurred on twooccasions. In 1992, the corporation offered tobuy the minority shares for 261,464 whichincluded a 21 percent discount from the bookvalue of the shares to reflect the minorityshareholder’s 26 percent interest in thecorporation. The minority shareholder did notspecify an acceptable price for his interest until1996 when he said that 600,000 would beacceptable. But, negotiations stalled when aletter from the plaintiff’s attorney indicated tothe corporation (and the defendant) that thenegotiations were over. Later, in August of2007, the defendant (majority shareholder)asked the plaintiff what price he would acceptfor his stock. In response, the plaintiff repliedthat a price of 1,825,000 would be acceptable.The defendant and corporation replied that theywould respond by December 1. However, theplaintiff sued in early October on the groundsthat the majority had breached their fiduciaryduties owed to him and had oppressed him.7The minority shareholder was a member of thecorporate Board of Directors when the originalcorporate bylaws were adopted. Under thosebylaws, the corporation had the right to buy backshares for 100 per share. In 1984, the bylawswere amended at the minority shareholder’srequest (the minority shareholder was a memberof the corporate Board of Directors at the time)and required a shareholder wanting to sell sharesto first offer them to the corporation or the othershareholders, with the price of the shares to bepegged at book value as of the close of the fiscalyear unless the parties agreed on a differentprice. The amended bylaw established the bookvalue at 686 per share.Note: In one of the leading cases onshareholder stock redemptionagreements, the Supreme Court ofPennsylvania approved a price fixed at“par” – the equivalent of book value ofthe corporation.4 That is precisely whatwas involved in this case. Importantly,the minority shareholder in this case wasa member of the Board of Directors andapproved the initial bylaw and the 1984amendment was made at his request.The bylaw change was not implementedby the unilateral action of the majorityshareholders.Trial court decision. The plaintiff sought eitherdissolution of the corporation or payment of hisinterest in the corporation plus damages. Healleged that he was removed as an officer by thedefendant,8 that he had no control or minimalinvolvement in the corporation’s day-to-dayfunctioning, that he had never been issuedpayment for dividends9 and never saw a returnon his ownership interest. Basically, he allegedthat his cousin’s conduct was designed to“freeze out a minority shareholder.” He furtherargued that his cousin breached fiduciary dutiesby engaging in corporate waste when he took asalary (even though he was not full time), usinga corporate vehicle, buying corporate meals andexpanding the board of directors to increase hisown authority.10 At its core, however, theminority shareholder simply disagreed with thedecision of the majority to acquire moreShortly after his parents died (in 1989 and1990), the minority shareholder begandemanding that either the corporation or thedefendant buy his stock.5 But, at no time didthe minority shareholder follow the 19842
or dividends “grossly out of proportion to theprofits of the corporation.” An attempt to “freezeout” a minority shareholder consists of repeatedefforts to “hold the minority shareholderhostage” by taking away their ready access tosell their stock in the marketplace. Indeed, thestatute at issue says that a corporation can bejudicially dissolved for conduct that is illegal,fraudulent or oppressive. The legislature’splacing of “oppressive” alongside “illegal” or“fraudulent” indicates a legislative intent that“oppressive” must be very serious and notsimply violate the desires of a minorityshareholder.farmland and build a cattle shed because itwould diminish the capital the corporation hadavailable to buy him out.11The corporation sought dismissal of the claims.The minority shareholder acknowledged that hehad no right to force dissolution or a buy-out ofhis interest. He also acknowledged that he hadnot complied with the 1984 buy-out provisionand that the defendant and the corporation haddealt with him in good faith on the twooccasions he made a demand for his stockinterest to be bought-out.The buy-out value, the majority shareholderpointed out, necessarily included a discount toreflect the minority interest and a discount toreflect the tax the corporation would incur uponliquidation. While the plaintiff argued that hisinterest shouldn’t be subject to a discount toreflect its minority interest, he refused to buyout the majority shareholder at its undiscountedvalue.Ultimately, the appellate court reversed the trialcourt on the basis that the evidence showed thatthe minority shareholder proposed a specificprice for buyout of his shares several times12 andthat a minority interest discount was notappropriate via Iowa Code §490.1301(4)(c).Indeed, the court reasoned that discounting stockto reflect a minority interest could, by itself,constitute oppressive conduct.In addition, the corporation argued that thelawsuit on the other claims was not filed withinthe five-year statute of limitations. The trialcourt agreed that the suit had not been filed in atimely manner, and dismissed the case.As for the five-year statute of limitations, thecourt reasoned that the attempt to negotiate aprice for the shares that included a valuationdiscount could be found to constitute acontinuing wrong such that the statute was nevertolled. The appellate court reached thisconclusion in spite of the fact that negotiationsonly occurred on two isolated occasions thatwere separated significantly in time. There wereno continual negotiations over any sustainedlength of time.Appellate court decision. On appeal, the courtnoted that a corporation may be judiciallydissolved if a shareholder establishes that adirector is acting in a manner that is illegal,oppressive, or fraudulent. The court went on todefine oppressive conduct as a violation offiduciary duties owed by a majority shareholderto the minority shareholders that violates the“reasonable expectations” of the minorityshareholders when they have committed capitaland labor to the enterprise- essentially a freezeout. But, under the facts of this case, theminority shareholder received his interest in thecorporation by gift and inheritance. He nevercommitted capital to the corporation and onlyworked on the farm for a short time before goingto law school and becoming a lawyer.Ultimately, the appellate court sent the case backto the trial court to determine the extent of theon-farm heir’s “oppressive conduct.”Trial court redux. At the second go-around atthe trial court, the corporation filed for summaryjudgment, but it was denied on the basis that thetrial court’s initial decision and the appellatecourt’s decision indicated that factual questionsremained on the issue of whether the majorityshareholder breached fiduciary duties. The trialcourt ultimately determined, however, that theminority shareholder had completely failed topresent any evidence that the majorityIn Iowa, oppressive conduct has traditionallybeen shown through a total waste or depletion ofcorporate assets, or perhaps, payment of salary3
shareholder or the corporation had breachedany fiduciary duties or acted in an oppressivemanner. The trial court dismissed the case.submitted for a ruling. Rule 1.904(1) (and,consequently, Rule 1.904(2)) only applies whena court rules on the merits of a case after trial.That didn’t happen in this case, and theprocedural rules the plaintiff cited should havebeen determined inapplicable. While theSupreme Court cited Batliner v. Sallee16 for itsreasoning on the jurisdictional issue, that caseinvolved the defendant choosing not to presentevidence and then moving to dismiss the case.Ultimately, that case was submitted for a finalruling on the merits. The procedural posture ofBatliner is completely different than the presentcase where the trial court clearly granted thedefendant’s motion at the conclusion of theplaintiff’s case due to a complete failure of theplaintiff’s evidence on the oppression issue.However, the minority shareholder filed aprocedural motion claiming that the court didn’tmake factual findings “concerning the basis ofthe petition.”13 In other words, the minorityshareholder disagreed with the trial court’sfindings and wanted them to “do it over” andfind that the corporation and the majorityshareholder had engaged in oppressive conductby not paying dividends and asserting that hisminority interest should be discounted. Hewanted the trial court to give specific reasonswhy there was no oppression, rather than simplyissue a two-sentence calendar entry granting thedefendant’s motion to dismiss and enteringjudgment for the defendant. The trial courtdenied the motion, and the minority shareholderappealed. The corporation moved for dismissalon the basis that the minority shareholder wasmerely challenging the trial court’s decision togrant the corporation a judgment as a matter oflaw and he was not entitled to a “do-over” bymaking the court tell him why oppression hadnot occurred rather than simply ruling that hehad failed to prove its existence. However, theIowa Supreme Court granted de novo review.The Merits. On the merits, the Court noted thatthe minority shareholder’s claim was that thecorporation be dissolved or that his shares bebought-out at fair market value. The Courtreferenced Iowa Code §490.1430, and noted thatunder subsection (2)(b) a corporation can bedissolved if the controlling shareholders act in amanner that is illegal, oppressive or fraudulent.There was no claim that illegal or fraudulentconduct had occurred, so the matter turned onwhether the controlling shareholders had actedin an oppressive manner towards the minorityshareholder. The Court noted that theinterpretation of “oppression” was a matter offirst impression. The Court noted that courts inother jurisdictions have given the term anexpansive definition that is generally subsumedunder the overall fiduciary duties that themajority shareholders owe the minority, and caninclude the reasonable expectations of theminority.17 The court cited numerous non-farmcorporation cases for the notion that minorityshareholders could have a reasonableexpectation of a return on equity.The Iowa Supreme CourtJurisdictional Issue. The Court asserted that ithad subject matter jurisdiction over the matterbecause it construed the minority shareholder’smotion that the trial court explain why thecorporation’s failure to pay dividends and let theminority shareholder participate in decisionmaking was not oppressive conduct as a motionthat fell within Iowa Rule of AppellateProcedure 1.904(2).14 The Court alsodetermined that the trial court’s oral explanationof the lack of the plaintiff’s evidence on theoppression issue constituted findings of fact towhich Rule 1.904(1) applied.15Note: There are two sources to ashareholder’s equity in a corporation.One source is the money that wasoriginally invested in the companycoupled with any additional investmentsthat are made at a later date. Anothersource is derived from retained earningsthat the corporation accumulates overImportantly, the trial court granted judgment forthe corporation at the close of the minorityshareholder’s case because the minorityshareholder failed to present any evidence ofoppressive conduct. The case was never4
time. Under the facts of the case, theminority shareholder never investedanything in the corporation, so the solesource of his equity was as a result ofthe investment of others and corporateretained earnings which were the resultof the efforts of others in profitablyrunning the farming business.18The Court cited an Iowa Court of Appealsdecision from 1988 as the basis for not enforcingthe provision.20 However, in that case, the courtonly refused to enforce the bylaw provision tothe extent that the court determined that theparties had waived an appraisal that wasrequired when the parties couldn’t agree onvaluation of the stock. Importantly, the court inthat case approved the trial court’s valuation ofthe stock in accordance with book value asadjusted for fair market value. The court did notdepart from the bylaw provision. That is acompletely different outcome than what theCourt took in the present case where the Courtrefused to uphold the bylaw provision where theminority shareholder simply ignored it.21The court also noted that transfer pricerestriction agreements could amount tooppressive conduct, again focusing on the notionthat a minority shareholder is entitled to a “fairreturn on their investment.” While the Courtnoted that Iowa law19 allows corporatedocuments to establish transfer price restrictions,such restrictions must not be “manifestlyunreasonable.” Again, the Court focused on thenotion that a minority shareholder shouldreceive “fair value,” referencing Iowa Code§490.1434(1). The Court read that statute tomean that “every shareholder may reasonablyexpect to share proportionally in a corporation’sgains,” and that when that “reasonableexpectation is frustrated, a shareholderoppression claim may arise.”Ultimately, the Court determined that the recordwas insufficient to determine whether the pricethat the corporation offered for the minorityshareholder’s shares was low enough, whencombined with no “return on investment” (as theCourt characterized it) to constitute oppression.Thus, because the trial court dismissed the casebefore the corporation presented evidence as tothe “fair market value” of the minorityshareholder’s interest, the trial court didn’t makethe necessary factual findings. As a result, theCourt reversed the trial court’s dismissal of thecase and remanded the case. The trial court wasinstructed to apply the “reasonable expectations”standard to the minority shareholder’soppression claim.Note: The court made this statement inthe context of a corporation. By doing so,the court revealed its misunderstanding ofthe fundamental distinction between acorporation and a partnership.The Court characterized its holding as theadoption of a “reasonable expectations standard”for the adjudication of minority shareholderclaims of oppression in Iowa. In essence, theCourt wrapped this standard into the overallfiduciary duties that controlling shareholdersowe the corporation and broadened those dutiesto apply to minority shareholders. Reasonableexpectations of minority shareholders, accordingto the Court, include a return on equity(irrespective of how the minority gained aninterest in the corporation) and payment of “fairmarket value” for their interest in thecorporation upon a buy-out.The Texas CaseThe Texas case involved a closely-heldcorporation (defined under TX law as havingfewer than 35 shareholders and stock that is notpublicly traded) that had four members of aboard of directors. Three different family trustsowned 72 percent of the voting stock. Another10 percent was owned by a descendant of anearly corporate owner, and the remaining 18percent was owned by board member that was adescendant of the corporation’s founder and wasa brother of the board’s chairman. Ultimately,that 18 percent share passed on the stockholder’sdeath to his surviving spouse. The survivingspouse then sought a buy-out of her shares. Theother family members that controlled theThe Court disregarded the 1984 buy-outprovision that was adopted at the plaintiff’sinsistence and with which he did not comply.5
corporation offered to pay her 1.7 million.Instead of accepting the offer, the survivingspouse hired an independent securities broker toplace a value on her minority interest. Thebroker determined that the book value of thesurviving spouse’s interest was 3.9 million ifan interested investor could personally meetwith the majority shareholders and corporatemanagers and be satisfied with the long-termcorporate business plan. However, hediscounted the value of the interest to 3.4million because of the directors’ refus
minority shareholder’s stock occurred on two occasions. In 1992, the corporation offered to buy the minority shares for 261,464 which included a 21 percent discount from the book value of the shares to reflect the minority shareholder’s 26 percent interest in the corporation. The minority shareholder did not
Agile Manifesto Statement One: Valuing Individuals and Interactions over Processes and Tools 66 Agile Manifesto Statement Two: Valuing Working Software over Comprehensive Documentation 67 Agile Manifesto Statement Three: Valuing Customer Collaboration over Contract Negotiation 71 Agile Manifesto Statement Four: Valuing Responding to .
minority women and girls, in all spheres of life, worldwide; minority issues need to maintain their rightful place on the agendas of decision makers. In this anniversary year, my Office is increasing its engagement on minority rights even further. We are organizing a series of subregional and regional events to address most topical minority issues
Valuing People Now: Summary Report March 2009-September 2010 22 Chapter 1: Introduction Report outline 1.1 This summary annual report brings together the key findings from the nine regional reports together with additional national data to show what progress has been achieved in delivering Valuing People Now in the first year up to 31 March .
racial/ethnic minority investigators and research participants. The presence of more minority group investigators would encourage more racial/ethnic minority individuals to participate in research. Moreover, both empirical and anecdotal evidence reveals that racial/ethnic minority investigators often have a particular commitment to research
Government of India Ministry of Minority Affairs *** Guidelines for implementation of Pradhan Mantri Jan Vikas Karyakram (PMJVK) 1. Background 1.1 In 1987, a list of 41 minority concentration districts was prepared, based on a single criterion of minority population of 20 percent or more in a district based on the .
The percentage of minority teachers was highest . at schools that had 90 percent or more minority students (55 percent) and was lowest at schools that had less than 10 percent minority students (2 percent). Spotlight B. Characteristics of Postsecondary Institutions Serving Specific Minority Racial/Ethnic Groups.
minority group relations. 2. The contact situation—the conditions under which groups first come together—is the single most significant factor in the cre-ation of minority group status. The nature of the contact situation has long-lasting conse-quences for the minority group and the extent of racial or ethnic stratification, the levels
Fedrico Chesani Introduction to Description Logic(s) Some considerations A Description Language DL Extending DL Description Logics Description Logics and SW A simple logic: DL Concept-forming operators Sentences Semantics Entailment Sentences d 1: d 2 Concept d 1 is equivalent to concept d 2, i.e. the individuals that satisfy d 1 are precisely those that satisfy d 2 Example: PhDStudent .
