The Iowa Court of Appeals issued its opinion today in the seemingly never-ending Baur Farms litigation. The court affirmed the district court’s order, which dismissed the minority shareholder’s lawsuit seeking to dissolve the corporation on grounds of “shareholder oppression.” This case was before the district court on remand after the Iowa Supreme Court issued its key 2013 ruling setting forth the new Iowa standard for minority shareholder oppression in the context of a closely-held corporation:
The determination of whether the conduct of controlling directors and majority shareholders is oppressive under section 490.1430(2)(b) and supports a minority shareholder’s action for dissolution of a corporation must focus on whether the reasonable expectations of the minority shareholder have been frustrated under the circumstances...We hold that majority shareholders act oppressively when, having the corporate financial resources to do so, they fail to satisfy the reasonable expectations of a minority shareholder by paying no return on shareholder equity while declining the minority shareholder’s repeated offers to sell shares for fair value.
The facts are well known by most, but they’re worth summarizing. The farming corporation is a small, closely held C corporation formed in 1966. The plaintiff is a minority shareholder, owning 26.29% of the shares. He is a director, but not an officer of the corporation. The plaintiff is an attorney who has never farmed. The plaintiff’s nephew is the current farm manager. The plaintiff’s cousin is the majority shareholder and former farm manager.
Over the years, the corporation did not pay dividends to its shareholders. The plaintiff never requested a dividend. All earnings were used to expand the operation. The corporation’s net worth grew from $1,344,298 in 1986 to $7,416,367 by 2007.
The plaintiff demanded nothing from the corporation until 1992, when he asked to be bought out. The corporation at that time offered to buy the plaintiff’s shares at a price that reflected a discount because the corporation would have to liquidate to buy the shares, thus triggering substantial built-in gains taxes. The plaintiff failed to respond for nearly three years. In 1996, the plaintiff said that he would accept $500,000, the corporation offered $430,000, and the negotiations stalled.
Finally, in 2007, the plaintiff offered to sell his shares to the corporation for $1,825,000. This included only a 6.5% discount for income tax upon liquidation, a figure that in no way adjusted for the impact liquidation would have on the other shareholders. The corporation did not immediately respond, and the plaintiff sued the corporation and majority shareholder seeking dissolution based upon illegal, fraudulent and oppressive conduct in violation of Iowa Code §490.1430(2)(b).
The district court originally dismissed the action based upon the statute of limitations. The court of appeals reversed, sending the case back for an analysis of whether oppression had occurred. The district court then granted the defendants’ motion for a directed verdict, finding no oppression. On appeal, the Iowa Supreme Court reversed and remanded, directing the court to apply the new “reasonable expectations” standard. In July of 2014, on remand, the district court found that the minority shareholder failed to meet his burden to prove oppression because the amount he demanded in the buyout exceeded the fair market value of his equity interest. Today, the Iowa Court of Appeals affirmed.
2016 Court of Appeals Decision
In its July 27, 2016, opinion, the court of appeals restricted its analysis to the plaintiff’s last offer to the corporation. This was in response to the Supreme Court’s directive to “determine whether the last position taken by [the corporation] during negotiations” was “incompatible with the reasonable expectations of a shareholder in [the plaintiff’s] position.” The court reasoned that the corporation’s last position taken was its failure to accept the plaintiff’s 2007 offer.
The court then clarified that although the district court engaged in a lengthy discussion regarding the book value of the plaintiff’s shares, the district court did not ultimately determine that the fair value of the plaintiff’s shares was their book value. Rather, the district court had ruled that “fair value of [the plaintiff’s] shares under the standard adopted by the Supreme Court does not exceed the amount of his proportionate share of the market value of the corporation’s assets, discounted to their liquidation value.”
Although the plaintiff argued that the district court improperly considered the impact of redemption on other shareholders in determining the reasonable expectations of the plaintiff, the court of appeals disagreed. In making this determination, the court relied on the words of the Supreme Court, “We hold that majority shareholders act oppressively when, having the corporate financial resources to do so, they fail to satisfy the reasonable expectations of a minority shareholder by paying no return on shareholder equity while declining the minority shareholder’s repeated offers to sell shares for fair value.” The court ruled that whether a corporation has the financial resources to purchase a minority shareholder’s shares is a legitimate consideration in determining reasonable expectations.
The court agreed with the plaintiff that the fair value of his shares should not include a minority discount. The court found, however, that the district court had not applied one in determining the fair value. Rather, the court found that the district court had determined that the fair value of the plaintiff’s shares was the market value of the corporation’s assets, discounted to their liquidation value.
The court agreed with the district court’s conclusion that the fair value of the plaintiff’s shares should take into consideration the taxes and other costs that would result from liquidation of the corporation.
The court concluded:
The Iowa Supreme Court held “majority shareholders act oppressively when, having the corporate financial resources to do so, they fail to satisfy the reasonable expectations of a minority shareholder by paying no return on shareholder equity while declining the minority shareholder’s repeated offers to sell shares for fair value." The district court concluded [the plaintiff’s] offer to sell his shares for $1.8 million exceeded the fair value of his interest in [the corporation] and, therefore, the corporation’s failure to accept his offer did not show oppression. We affirm the district court's conclusion.
And so another chapter closes in this decades-long dispute. We’ll have to see whether the Supreme Court gets another chance to clarify this evolving area of Iowa law.
We’ll keep you posted!
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