Minority Shareholders in Farm Corporation Failed to Show Oppression
Today, the Iowa Court of Appeals ruled that two shareholders of a family farming corporation did not prove their claim of minority shareholder oppression. In making its ruling, the court relied upon the Iowa Supreme Court’s holding in Baur v. Baur Farms, Inc., 832 N.W.2d 663, 668 (Iowa 2013), which defined the applicable standard of proof as follows: "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 farming corporation, which was established in 1977, had four remaining shareholders at the time the action was filed. Two sibling shareholders filed their lawsuit against their brother, their father, and the farming corporation (operated as an S corporation), seeking to have the corporation dissolved as a consequence of minority shareholder oppression. Although, each stockholder held 170 shares in the corporation, the father retained the majority of voting shares. As such, he retained control of the corporation. The defendant brother was the on-farm heir who was employed to run the farming business. He lived on the farm in a home provided by the corporation as part of his compensation.
The plaintiffs filed an action alleging minority shareholder oppression. They contended that they had not received a fair return on their ownership in the corporation, even though they had made capital contributions. The action was heard by the business court, which ruled in favor of the defendants. The plaintiffs appealed, and the Iowa Court of Appeals affirmed.
The plaintiff siblings’ first argument on appeal was that all shares in the corporation should have been voting shares because the father’s 1986 stipulation accompanying his divorce from their mother so stated. The court ruled, however, that neither the articles of incorporation nor the bylaws were modified to reflect such a change. And, the court held that even as president and majority shareholder of the voting stock, the father was not authorized to bind the corporation to the terms of his dissolution, absent corporate action.
The court then found that the five-year statute of limitations applied to limit the court’s consideration of conduct to that which occurred after April 14, 2006. The continuing wrong doctrine did not apply in this case to displace the limitations period because the siblings alleged oppression based on a variety of discrete acts that could have been challenged when they occurred. This was in contrast to cases (like Baur) where the alleged wrongdoing was a repeated refusal to buy out the minority shareholder absent a minority discount.
Finally, the court turned to the heart of the siblings’ claim: that they were oppressed by the actions of their father and brother. They cited multiple actions in support of their claim, including the following:
- The brother used cash-accounting to hide profits that would otherwise warrant a shareholder distribution.
- The corporation paid $203,000 to remodel the farmhouse in which the brother lived.
- The corporation could have generated more revenue (and thus more shareholder distributions) by cash renting the ground rather than having the brother farm it for the corporation.
- The father and brother were enjoying “patronage” from the corporation.
- The brother had given them “lowball” offers of $100,000 each to buy their shares.
The court rejected the validity of the siblings’ proof, crediting the CPA who testified that cash accounting was the norm for a farming operation and that using accrual accounting would be the anomaly. The court also found that the remodel was reasonable and that the corporation would reap the benefit of the investment if it decided to sell the property. The court also credited the testimony of an expert who stated that the defendants were running a "fairly typical farm" and that they did not appear to be doing anything intentionally to undercut yields or profit. As such, the court ruled that strategic decisions made by farm corporate directors were protected by the business judgment rule. The court also credited testimony from an expert who opined that decisions made by the controlling shareholders had valid business purposes. The court noted it “critically” important that the father and brother did not draw large salaries.
Finally, the court rejected the siblings’ argument that the brother’s "lowball" offers to buy out their shares supported their oppression claim. The court ruled that to prove shareholder oppression, plaintiffs had to show that they made "repeated offers to sell shares for fair value" and that those offers were rejected. Because the siblings never made offers to sell their shares (aside from settlement negotiations), let alone repeated offers, the court ruled they failed to show their reasonable expectations were frustrated by the actions of their brother and father.
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