MINORITY SHAREHOLDERS – EQUAL VALUATION FOR ALL

Posted almost 2 years ago. Applies to Florida, 1 helpful vote

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Corporations, being governed by majority rule, may decay into a tyranny by the majority. When this state of affairs occurs, the minority shareholders interests in the corporation are either ignored or exploited by the majority. In large publicly traded corporations, the minority’s dissatisfaction is relieved by the minority’s option to easily sell shares on the open market. While this option does not alter the behavior of the greater business, the shareholder is generally able to recoup any investment, possibly with a profit, while leaving. A shareholder in a closely held corporation, or other entity, does not have this easy avenue of recourse. Instead, as there is generally no market for the shares, the minority owner must either suffer in silence, convince the majority to relent, or sell out to the majority most likely at a substantial loss. The Florida legislature has taken some steps to correct these injustices with the implementation of Florida Statutes §607.1301 called Dissenters’ Rights and §607.1340 for Judicial Dissolution. The shareholder’s right of dissent in Florida Statutes §607.1301, et seq., also referred to as appraisal rights within the statute, allows a shareholder to obtain fair value for shares sold in objection to a major corporate transaction. The key differences between this form of sale and an ordinary sale of interest are the limitations on the times this sale might be made, only during major corporate transactions, and the price of fair value rather than fair market value. Moreover, under §607.1303 record shareholders may act on behalf of some or all of the beneficial shareholders represented, provided the record holder notifies the corporation of the beneficial holders’ names and addresses. However, notice must be given before a vote on an action or within 20 days after being informed the action will occur. The same section, §607.1321 also requires that the shareholder not be permitted to vote any shares owned in favor of the proposed action; essentially this prevents action on voter’s regret. A right of appraisal is only valid during the instances listed under §607.1302(1); mergers, share exchanges, dispositions of assets outside of the course of business, or amendments to articles of incorporation that affect the above or the rights to vote on future amendments. Prospective dissenters may not demand appraisal in response to more mundane activities such as marketing strategies or executive compensation packages. Those who wish to protest these decisions would be best advised to consider a derivative action against the board of directors. Additionally, corporations listed on major exchanges or those with at least two thousand shareholders owning at least ten million dollars worth of a single class of shares are exempted from the section under §607.1302(2). The rationale for the first exception is straightforward, a ready market exists for the shares and a similar rationale holds for the second as the entity is assumed to be large enough that one can find another person or entity willing to purchase the shares. Fair value is generally much more favorable to the prospective seller than fair market value. Market value would entail getting a price at whatever the market would stand after the action is made public. Fair value as stated in §607.1301(4)(a) fixes the date of valuation immediately before the action would occur. Courts have noted generally that dissenter’s rights statutes are drafted to favor minority shareholders. Boettcher v. IMC Mortg. Co., 871 So.2d 1047, 1052 (Fla. 2d DCA 2004). About the only time fair value results in a lower price than market value would be when a good faith effort to restructure the corporation will be made, but will result in a lower overall value of the shares in a given class. The greatest concern in fair value of minority shares is the refusal of several states to apply minority discounts in the valuation of the shares appraised. Recent cases Friedman v. Beway Realty Corp, 661 N.E. 2d 972 (N.Y. 1995) held that such discounts would improperly deprive the shareholders of the value other their shares compared to those owned by others in the class and would go against the intent of dissenters’ rights. See also Blicth v. Peoples Bank, 540 S.E. 2d 667 (Ga. 2000); Camino, Inc. v. Wilson, 59 F.Supp. 2d 962 (D. Neb. 1999). Shareholders are not limited to getting fair value for shares only during major transactions if the shareholder seeks court appointed judicial dissolution. This drastic sounding section, Florida Statutes §607.1430, et seq., is a petition for the court to dissolve the entity so that the shareholder gets fair value for the shares. However, Florida courts are loath to disestablish an ongoing business concern. Jones v. Harvey, 82 So.2d 371, 372 (Fla. 1955). Courts often find other equitable forms of relief rather than total dissolution of the business entity. An important change to §607.1430 during the 1994 amendments was in §607.1434(4) which expressly provides judicial authority to grant forms of relief other than the dissolution of an ongoing concern. Most commonly, the remaining shareholders have the option to purchase shares under §607.1436 rather than have the entity dissolved. Judicial dissolution narrowly defines the class of those whom may bring an action under the section. First, an action is available when the board of directors is deadlocked that shareholder are unable to break, causing paralysis in the entity. The other action arises when corporate assets are misapplied or wasted. Again, misapplication and wasting of assets refers more towards significant acts of policy and manipulation of share classes and valuation; disagreements in building a factory in Location A versus Location B are handled under other derivative action law, and the business judgment rule. Waste and misapplication by itself does not cover the various forms of majority oppression such as being “frozen out" of the corporation followed by an offer from the majority to purchase at below market prices. Over two thirds of the states have statutory provisions regarding shareholder oppression. Florida is not one of those The legislature specifically excluded such provisions in adopting portions of the Model Business Corporation Act with the stated aim of avoided unnecessary litigation. If litigation is to proceed in Florida, the claim must be addressed in language to resemble waste, or it must be predicated on a breach of fiduciary duty theory. Firing a minority shareholder employee, then watering down the value of the class of stock violated this duty. Biltmore Motor Corp. v. Roque, 291 So.2d 114 (Fla. 3d DCA 1971). Similarly, a valid claim was sustained when a corporation purchased a majority shareholder’s stock at a price inflated to bring the corporation in the shareholder’s debt. Tillis v. United Parts, Inc., 395 So.2d 618 (Fla. 5th DCA 1981). Unlike the minority protection present in dissenter’s rights action, some Florida courts have imposed minority discounts on the value of shares held in close corporations during dissolution actions. Cox Enterprises, Inc. v. News-Journal Corp., WL 2675008 (M.D. Fla. 2005); Munshower v. Kolbenheyer, 732 So.2d 385 (Fla. 3d DCA 1999). One positive aspect of dissolution actions is that while there still must be a fixed date of valuation for the shares, this date need not be set to immediately before a specific act as during a claim of dissenter’s rights. The more flexible valuation can compensate for a series of actions taken to artificially lower stock value. Finally, while there is no existing case law in Florida, if a court chooses to follow Delaware law, then it might apply forward looking valuation techniques that may inflate stock value based on predicted gains.

Additional Resources

Key Cases - Minority Shareholders 1. Boettcher v. IMC Mortg. Co., 871 So.2d 1047 (Fla. 2d DCA 2004). A requisite majority of the corporation's shareholders voted to approve the sale of a substantial amount of its assets. However, a number of shareholders dissented from the sale and demanded payment of the fair value of their shares. On appeal, the court found that the corporation was not entitled to a summary judgment. To meet its burden of demonstrating its entitlement to summary judgment, the corporation was required to establish a prima facie case that the fair value of its shares on the relevant date was as it contended. The dissenting shareholders were not required to prove the existence of genuine issues of material fact unless the corporation first met its burden. Because the closing price of the corporation's shares on the relevant date did not exclude appreciation or depreciation in anticipation of the proposed transaction and the corporation did not contend that exclusion was inequitable, the corporation's submission of evidence of the closing price of its shares on the relevant date was insufficient to establish a prima facie case on the issue of fair value. Therefore, the corporation failed to carry its burden of demonstrating its entitlement to summary judgment. 2. Friedman v. Beway Realty Corp, 661 N.E. 2d 972 (N.Y. 1995). When the corporations failed to offer to purchase the shares, the minority stockholders sought a judicial determination of fair value. The state supreme court discounted the value for unmarketability, but refused to discount for minority status. The appellate division affirmed. On appeal, the court held that imposing a discount for minority status would have deprived the minority shareholders of their proportionate interest and resulted in minority shares being valued below that of majority shares in conflict with the equitable and protective purposes of NY Law. 3. Blicth v. Peoples Bank, 540 S.E. 2d 667 (Ga. 2000). On appeal, the court reversed the judgment as to the fair value of the shares because it was inappropriate to include the minority and marketability discounts. The term "fair value"required the courts generally to award a shareholder his or her proportional interest in a corporation after valuing the corporation as a whole. However, the trial court did not err in denying attorney fees to appellant, having found that the dispute between the parties as to the value of the shares was genuine and the parties had acted in good faith. 4. Camino, Inc. v. Wilson, 59 F.Supp. 2d 962 (D. Neb. 1999). Plaintiff brought an action under the Nebraska Dissenters' Rights Law, Neb. Rev. Stat. Ann. § 21-20,137, et seq., to determine the fair value of stock tendered to it by defendants. The court ruled that a shareholder had a right to dissent from the decision of the majority of shareholders to sell substantially all of the corporation's assets under Neb. Rev. Stat. Ann. § 20-20,138 (c). Further, the court held that fair value, with respect to a dissenter's shares, meant the value of the shares immediately before the effectuation of the corporate action to which the dissenter objected, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion was inequitable. The court entered judgment for defendants, concluding that they were not paid the fair value for their stock by plaintiff. 5. Jones v. Harvey, 82 So.2d 371, 372 (Fla. 1955). Without notice to petitioners or to the corporation, the trial court entered an order enjoining petitioners from interfering with the operation of the restaurant and appointed a receiver for the corporation's assets. The trial court denied petitioners' motions to dismiss the complaint and to dissolve the injunction and discharge the receiver. The trial court also ordered the sale of the corporation's stock and assets. The supreme court granted supersedes pending prosecution of certiorari. The court granted certiorari and quashed the judgment appointing the receiver and ordering the sale of the corporation's stock and assets. The court found no basis for the appointment of the receiver or for the sale of the stock. There was no showing of fraud, double-dealing, or loss of corporate assets. 6. Biltmore Motor Corp. v. Roque, 291 So.2d 114 (Fla. 3d DCA 1971). The court determined that there had been no showing of reversible error by the trial court, and that appellants had entered into a scheme to dilute the value of appellee's stock. The court found there was no legitimate business purpose for appellant's actions, and that appellants had committed an abuse of discretion and a violation of their fiduciary duties to appellee. The revocation and recission of the mandatory recapitalization was affirmed. 7. Tillis v. United Parts, Inc., 395 So.2d 618 (Fla. 5th DCA 1981). The circuit court dismissed the action for failure to state a claim. The court reversed the circuit court's decision. The court ruled that appellants' allegations sufficiently stated a claim that appellees violated their fiduciary duty as majority shareholders, and corporate officers. In so ruling, the court recognized that appellees' had a duty to buy stock at the lowest attainable price for the corporation, and their failure to do so, especially when they were also acting in their own self-interest, if proven, could have supported a derivative claim. 8. Munshower v. Kolbenheyer, 732 So.2d 385 (Fla. 3d DCA 1999). The court affirmed the order, finding that the trial court's conclusions were supported by the evidence presented and that there was no basis to disturb its findings or valuations. The court further found no error in the trial court's denial of plaintiff's request for attorney fees and expert witness fees because defendants did not act fraudulently or illegally. However, in addressing the part of the final judgment withholding in escrow a portion of the value payment to plaintiff, the court found error only in the amount withheld. While the trial court had the authority to consider the amount that plaintiff owed to defendant corporation as a set-off to his award, it abused its discretion in withholding an amount much greater than defendants asserted he owed. Accordingly, the court modified that portion of the judgment. 9. Hanes v. Watkins, 63 So. 2d 625 (Fla. 1953). The minority shareholder entered into a contract with the majority shareholder, to acquire the shares of an existing corporation. In exchange for operating the business, the minority shareholder was to acquire 49 percent of the corporation's stock. Thereafter, the parties agreed to share all net profits equally. When business disputes arose between the parties, the minority shareholder then sought declaratory judgment that the business relationship was in fact a partnership, not a corporation, and requested rights in a piece of real estate acquired by the corporation. The trial court found that the parties purchased a corporation, and intended to continue the business as a corporation. The trial court further found that there was no substantial evidence to support the contention that the corporation should be dissolved and a partnership declared. On appeal, the court affirmed the judgment of the trial court. The court noted that the trial court was the proper trier of the factual issue of whether or not the parties were doing business as a corporation. The court further found that the minority shareholder failed to prove that the corporation should be dissolved as a legal entity. 10. Hill v. Brady, 737 So. 2d 1243 (Fla. 5th DCA 1999). Absent an injury separate and distinct from that of the other shareholders, appellant minority shareholder could not bring direct action to redress injuries sustained directly by him when the action was derivative of the rights of the corporation.The court held that the damages appellant complained of were only sustained as a direct result of an injury to the corporation and only indirectly to appellant. Where the injury was primarily against the corporation, appellant's right to bring that cause of action derived from, and were properly exercised on behalf of, the corporation. Although appellant's allegations were that appellees' actions adversely affected the corporation's business and thereby caused appellant's stock to become worthless, those claims were derivative of the rights of the corporation and were properly directed on behalf of the corporation. Absent an injury separate and distinct from that sustained by all the other shareholders, appellant could not bring a direct action to redress an injury sustained directly by him. 11. Hollander v. Rosen, 555 So. 2d 384 (Fla. 3d DCA 1989). When appellant minority shareholder requested inspection of the business records pursuant to Fla. Stat. §607.157(4), appellee majority shareholders' failure to obtain authority to transact business in Florida could not be used as a shield to avoid obligations which otherwise would be imposed. 12. Corlett, Killian, Hardeman, McIntosh & Levi, P.A. v. Merritt, 478 So. 2d 828 (Fla. 3d DCA 1985). In the absence of an article of incorporation, by-law, agreement, or equitable or ethical consideration, a professional corporation was not required to redeem the shares of departing minority shareholders. There was no equitable basis for the court to distribute corporate property. The court held that there was no basis to treat appellant as a partnership. 13. Jones v. Highway Inn, Inc., 424 So. 2d 944 (Fla. 1st DCA 1983). Minority shareholder who failed to invoke his exclusive remedy under the dissenter's right statute was bound by the terms of the proposed corporate action and could not thereafter challenge the sale seeking a dissolution of the corporation. Fla. Stat.§ 607.247 provided to a minority shareholder, who opposed the sale of corporate assets, an exclusive remedy. Accordingly, plaintiff who did not elect within 10 days from the date of the vote of sale his dissenter's right to be paid in cash the full value of his shares, was bound by the terms of the proposed corporate action and could not thereafter challenge the sale. 14. Collins Fruit Co. v. Collins, 214 So. 2d 779 (Fla. 2d DCA 1968). Activities such as hunting and fishing and using corporate funds for personal bills did not constitute good cause for discharging president under employment contract when business did not suffer and pattern of behavior had been established. 15. Levy v. Gourmet Masters, Inc., 214 So. 2d 82 (Fla. 3d DCA 1968). Denial of shareholder's motion to vacate the sale of a corporation's assets was reversed as the facts that the price obtained from the sale was inadequate, the sale itself was not published, and the assets were not described indicated irregularity. 16. Blanchard v. Commonwealth Oil Co., 116 So. 2d 663 (Fla. 3d DCA 1959). The creditor's request for a sale of assets on dissolution of the debtor company should not have been granted because the property was divisible and distributable and the sale should not have proceeded over objections of minority shareholders group.

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