Oppression of Minority in Family Farming Corporation?

Here, two brothers formed a farm corporation in 1966. Only one of the brothers had a son who wanted to farm, so that brother’s estate plan was drafted such that the son would receive  majority control of the business with the parent’s remaining shares passing to other children who did not have an interest in farming.  The parents died and majority control passed to the on-farm heir.  Upon the son’s subsequent retirement, he delegated the day-to-day management of the corporation to a nephew and one of his off-farm siblings tried to sell his shares to the on-farm heir.  However, the siblings couldn’t reach an agreement concerning the price of the shares.

The off-farm sibling filed a petition with the trial court in 2007 to dissolve the corporation.  He also filed a claim against the majority owner on claims of breach of fiduciary duty and oppressive conduct. The off-farm heir sought either dissolution of the corporation or payment of interest in the corporation plus damages. He alleged that he was removed as an officer by his cousin, that he had no control or minimal involvement in the corporation’s day-to-day functioning, that he had never been issued payment for dividends and never saw a return on his ownership interest. Basically, he alleged that his cousin’s conduct was designed to “freeze out a minority shareholder.” He further argued that his cousin was engaging in corporate waste by accepting a salary even though he was not full time, using a corporate vehicle, buying corporate meals and expanding the board of directors to expand his own authority. 

The on-farm heir sought dismissal of the claims.  He argued that a minority shareholder has no right to force dissolution or force a buy-out of his interest. Further, the on-farm heir argued that the lawsuit on the other claims was not filed within the five-year statute of limitations.  The trial court agreed that the suit had not been filed in a timely manner.

On appeal, the court noted that a corporation may be judicially dissolved if a shareholder establishes that a director is acting in a manner that is illegal, oppressive, and fraudulent. The court went on to define oppressive conduct as a violation of fiduciary duties owed by a majority shareholder to the minority shareholders and a violation of the “reasonable expectations” of the minority shareholders when they have committed capital and labor to the enterprise- essentially a freeze out. In Iowa, oppressive conduct has traditionally been shown through a total waste or depletion or corporate assets, or perhaps, payment of salary or dividends “grossly out of proportion to the profits of the corporation.” An attempt to “freeze out” a minority shareholder consists of repeated efforts to “hold the minority shareholder hostage” by taking away their ready access to sell their stock in the marketplace.  Accordingly, the appellate court reversed on the basis that the evidence showed that the minority shareholder proposed a specific price for buyout of his shares several times and that a minority interest discount was not appropriate via Iowa Code §490.1301(4)(c) – that could constitute oppressive conduct.  As for the five-year statute of limitations, the court reasoned that the on-farm heir’s behavior could be found to constitute a continuing wrong sufficient such that the statute was never tolled.  Ultimately,  the appellate court sent the case back to the trial court to determine the extent of the on-farm heir’s “oppressive conduct.”  Baur v. Baur Farms, Inc., No. 9-931/09-0480, 2010 Iowa App. LEXIS 117 (Iowa Ct. App., Feb. 10, 2010).