[Shareholder Oppression] California Buyout statute must include value of deri...
Eric Fryar
Cotton v. Expo Power Systems, Inc., 89 Cal.Rptr.3d 112 (Cal. App. 2 Dist., February 09, 2009). [Read Opinion]
This case involves the application of California Corporate Code §2000 [Read Statute] The minority shareholder, who owned 1/3 of the shares in a California corporation, became convinced that the majority shareholder was diverting corporate assets and opportunities to his own benefit, with the eventual result that the corporation became essentially insolvent. A minority shareholder filed a derivative suit on behalf of the corporation seeking damages for breach of fiduciary duty but also seeking other equitable relief including dissolution of the corporation. The majority shareholder exercised his option under § 2000 of the California Corporate Code, which permits the corporation or a shareholder controlling 50% or more of the voting shares to avoid a voluntary or involuntary dissolution by purchasing the dissenting shareholders' stock for "fair value." If the parties cannot agree on a fair value, then the court is required to appoint three disinterested appraisers. The court has the power to order that evidence be submitted to the appraisers, and court is ultimately required to enter a decree, based on its review and confirmation of the appraisers' recommendation, which gives the corporation or majority shareholder the option of dissolution or purchase of the minority shareholder's shares at the price stated in the decree.
The controlling shareholder in this case sought to escape the claim for damages in the derivative action through the mechanism of § 2000. It should be noted that had the minority shareholder not sought dissolution in the same proceeding this gambit would not have been available to the majority shareholder. The court submitted the valuation to the appraisers, who determined that the liquidation value of the corporation was $100,000, but who declined to try to put a value on the derivative claims. The trial court recognized that the value of the corporation was severely diminished by the conduct that was the basis of the derivative claims. Therefore, the trial court entered a decree setting the buyout price at one third of $100,000, but deferred the buyout date until after the resolution of the derivative claims, presumably to allow the plaintiff recover his share of damages resulting from the derivative claims.
The Court of Appeals held that the trial court had misapplied § 2000. The Court of Appeals recognized that the derivative claims were assets of the corporation and not the property of the minority shareholder. However, the court also noted that the plaintiff would lose his standing to assert the derivative claims as a result of the buyout order. The Court of Appeals held that the trial court did not have the power under § 2000 to defer the buyout date until after the derivative claims were tried but was required to assign a value to the derivative claims. The Court of Appeals acknowledged that the appraisers in this case did not feel qualified to put a value on the derivative claims but held that, in the absence of an appraisal, the trial court was required to assign a value based on the evidence submitted to the court. The Court of Appeals noted that California courts had in the past considered potential liabilities from pending litigation against the corporation as a factor affecting the fair value under § 2000. See Brown v. Allied Corrugated Box Co. 91 Cal.App.3d 477, 482, 154 Cal.Rptr. 170 (1979). The court also noted that, in the context of a corporate merger, courts are required to determine whether or not conduct by the corporate officers and directors that is the subject of shareholder claims of fraud and breach of fiduciary duty diminished the value of the dissenting shareholders' stock, and if so to adjust the value in the appraisal proceeding. See Steinberg v. Amplica, Inc. 42 Cal.3d 1198, 1209, 233 Cal.Rptr. 249, 729 P.2d 683 (1986).
www.FryarLawFirm.com www.ShareholderOppression.com
--
Posted By Eric Fryar to Shareholder Oppression at 3/17/2009 03:23:00 PM