Valuation Date of Family Farm Corporation’s Shares for Buyout in Lieu of Dissolution Affirmed
On May 22, 2024, the Iowa Court of Appeals affirmed the district court’s valuation of a family farm corporation’s shares. The plaintiffs initially sued claiming minority shareholder oppression, but amended their petition to seek a corporate dissolution eight months later. The defendants argued the valuation date should be the day the original petition was filed, not the day before the amended petition. They also argued the fair value should include discounts for hypothetical tax consequences and transaction costs. The Court of Appeals rejected these arguments, finding it was not necessary to change the presumptive valuation date found in the election-in-lieu-of-dissolution statute. The court also ruled that the tax consequences associated with a sale of the corporation’s assets should not be factored into the valuation since there was no plan to sell any assets.
Facts
Daniels, Inc. is an Iowa corporation that owns approximately 1100 acres in northwest Iowa. The corporation also sells seeds, farms additional rented ground, transports harvested crops, and installs drainage tile. There are six shareholders - five siblings and the estate of their mother. The five siblings include three brothers, who are active in the corporation’s operations, and two sisters, who are not. The brothers and mother’s estate own 70.4% of the shares and the sisters each own 14.8%.
On December 16, 2020, the sisters filed suit against the corporation and its majority shareholders claiming minority-shareholder oppression. In their plea for damages, they asked the court for compensatory and punitive damages, attorney fees, and “such other and further relief that the Court may deem just and equitable.”
On August 24, 2021, the sisters amended their petition and added a claim for dissolution under Iowa Code § 490.1430. As a result of bringing the dissolution claim, the corporation had ninety days to choose whether to buyout the sisters’ shares under the election-in-lieu-of-dissolution statute (§ 490.1434). The corporation did not elect to buy the shares within 90 days.
The litigation continued and a trial was held in January 2023. On the third day of trial, the brothers decided to elect a buy out the sisters’ shares instead of having the corporation dissolved. A late election is allowed at the court’s discretion under § 490.1434(2). The sisters agreed to the late election, and the court allowed it. However, because the siblings could not agree on the fair value of the shares, the court had to set that value.
The trial court ruled that the presumptive valuation date under § 490.1434 was the day before the sisters filed their amended petition. Both parties’ experts agreed that the net-asset method was the appropriate valuation method, and the court affirmed. However, the brothers’ expert testified that there should be a discount applied to the valuation to account for the transaction costs and tax consequences of a hypothetical liquidation. The court found this discount was unnecessary since there was no evidence of a contemplated sale and one brother testified that the corporation would continue farming. The court also found the sisters’ expert to be more credible than the brothers’ expert.
Ultimately, the court valued each sister’s shares at $2,860,128.90. The brothers appealed the court’s determination arguing the valuation date should be when the original petition was filed and that a discount should be applied for transaction costs and theoretical tax consequences.
Opinion
The Court of Appeals affirmed the district court’s valuation date. In arguing that the date of the valuation should be the day before the original petition was filed, the brothers noted that the dissolution claim was based on the same conduct as the minority-shareholder oppression claim and that the relation-back doctrine should be applied. They also argued that the sisters constructively pled a dissolution claim when they asked the court for “other and further relief” in their original petition.
The Court of Appeals rejected the argument, finding the statute was unambiguous when it states a buyout is allowed once a dissolution petition is filed and not before. Additionally, the court reasoned minority shareholders should have the ability to sue for damages without giving the corporation the right to buy out the shares. If the court found the sisters constructively pled dissolution by asking for other and further relief, it “would mean that a corporation or its shareholders could elect to cut off an oppression suit by shareholders who are merely seeking damages and unilaterally force them to give up their shares for fair value[.]” Finally, applying the relation back doctrine would mean the notice provisions in § 490.1434 would have expired before the corporation even had a chance to comply.
The Court of Appeals affirmed the district courts method of valuation, finding there was no need to apply a discount for potential corporate taxes or transaction costs. § 490.1434 requires the buyout price to be “fair value,” but the statute does not define fair value. In interpreting the term for another section of Iowa Code Chapter 490, the Iowa Supreme Court defined the method for determining “fair value” occurs by “‘[u]sing customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal’ while not ‘discounting for lack of marketability or minority status.’” Guge v. Kassel Enters., Inc., 962 N.W.2d 764, 770 (Iowa 2021). Additionally, Guge states that tax consequences should only affect fair value “in the most limited circumstances.” The court reasoned this case does not have those circumstances because there was no evidence the corporation was planning to liquidate assets prior to the dissolution claim. Finally, the court found no need to deduct transaction costs from the fair value since the district court found credible the sisters’ expert who denied the need to discount for transaction costs.