Business Law Chapter 36 Homework Similarly, since shares of a private corporation generally sell

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CASE 36-2

SHAWNEE TELECOM RESOURCES, INC. v. BROWN

Supreme Court of Kentucky, 2011

354 S.W.3D 542

http://scholar.google.com/scholar_case?

q=354+S.W.3D+542&hl=en&as_sdt=2,34&case=295706676174884700&scilh=0

Abramson, J.

[In December 2003, Shawnee Technology, Inc. (Shawnee Tech), a Kentucky corporation,

merged into Appellant Shawnee Telecom Resources, Inc. (Shawnee Tel), also a Kentucky

corporation. The merger plan provided that one of Shawnee Tech’s shareholders, Kathy

Brown, would receive cash for her shares instead of shares in the new company, a so-called

cash-out merger authorized by the Kentucky Business Corporation Act. Under that statute’s

dissenters’ rights provisions, Brown demanded from Shawnee Tech the “fair value” for her

shares. Disputing the amount of Brown’s entitlement, Shawnee Tech brought an action in a

Kentucky trial court for an appraisal of Brown’s interest in the company.

The Commissioner was not entirely satisfied with either expert’s analysis. Instead,

the Commissioner, borrowing from both experts’ analyses, found a capitalized earnings

value of $2,304,178 and a net asset value of $1,343,860. The Commissioner did, however,

discount the capitalized earnings value for lack of marketability. Although he acknowledged

that the current version of the Model Business Corporations Act (MBCA) precludes

marketability discounts, the Commissioner nevertheless ruled that such discounts are

valuation amounted to an impermissible market value determination, the Court of Appeals

reversed the trial court’s judgment and remanded for a determination of the fair value of

Brown’s shares without reference to the company’s net asset value and without any discount

for lack of marketability. Shawnee appealed.]

At common law, [citation], prior to the advent of corporation statutes, unanimous

shareholder consent was required to effect fundamental changes in the corporation. The

minority’s veto power enabled it to create a nuisance value for its shares, so to counteract

such abuses the early corporation statutes provided that even fundamental changes could be

effected by majority, rather than unanimous, vote. [Citation.] To compensate minority

* * *

* * * Indeed, the remedy is now invoked primarily in situations not where the

minority shareholder wants out, but where he or she is being forced out. * * *

Dissenters’ rights statutes, as noted above, exist in some form in every state, and in

the vast majority of the states protection is accorded by an appraisal remedy pursuant to

which the dissenting shareholder is entitled to the “fair value” of his or her shares. * * *

[U]nder [the Kentucky statute which is based on the Model Business Corporation Act], “fair

As long as liquidity seemed the purpose of the appraisal remedy, courts often

understood “fair value” to mean essentially fair market value and understood their task as

identifying a sort of quasi-market price for the dissenting shareholder’s particular shares.

[Citation.] Since a block of shares that does not convey a controlling interest in the company

would ordinarily sell for less than a block that did, in arriving at this hypothetical market

discounts meant to account for factors that affect the value of the going concern, such as a

company’s reliance on one or a few key managers or dependence upon a limited customer or

supplier base. [Citation.]

* * *

* * * [T]he vast majority of states to consider the appraisal remedy for ousted

minority shareholders have * * * held that “fair value” in this context means the

shareholder’s proportionate interest in the company as a whole valued as a going concern

according to accepted business practices. [Citation.] Because an award of anything less than

a fully proportionate share would have the effect of transferring a portion of the minority

interest to the majority, and because it is the company being valued and not the minority

shares themselves as a commodity, shareholder-level discounts for lack of control or lack of

marketability have also widely been disallowed. [Citations.]

Recognizing and endorsing the trend against such discounts, in 1994 the American

Law Institute’s Principles of Corporate Governance recommended that in dissenters’ rights

appraisal proceedings “fair value” should be the value of the shareholder’s “proportionate

interest in the corporation, without any discount for minority status or, absent extraordinary

Model Business Corporation Act § 13.01(4)(ii)(iii) (2006).

As of 2010, ten states had adopted the 1999 Model Act revision, [citation], but even

in states, like Kentucky, that continue to use the 1984 version of the Model Act, “fair value”

has been construed as the dissenting shareholder’s pro rata share of the company as a whole,

without shareholder-level discounts for lack of control or lack of marketability. [Citations.]

“fair market value” as indicating an express rejection of a market value standard; and have

endorsed the * * * view that if the appraisal remedy is to be effective, as the legislature must

have intended, then shareholder-level discounts should not be applied.

* * *

* * * The [Kentucky] legislature’s choice of “fair value” as the measure of the

minority shareholder’s entitlement is significant in that it does not limit the remedy to the

fair market value of the dissenter’s shares, as Shawnee would have it, but contemplates that

“fairness” may entail other considerations. Beyond this general intent to protect minority

When we do, as the discussion above indicates, we find a broad consensus among

courts, commentators, and the drafters of the Model Act that “fair value” in this context is

best understood, not as a hypothetical price at which the dissenting shareholder might sell

his or her particular shares, but rather as the dissenter’s proportionate interest in the

company as a going concern. Arrived at only in the long course of many cases balancing the

interest of the corporate majority in controlling their investment with the interest of the

minority in fair treatment, this understanding reflects a reasonable balance of those

competing interests. It does so by helping to insure that the majority’s freedom to eliminate

minority shareholders is not employed to transfer a portion of the minority interest to the

* * * Although appraisers and courts remain free to consider market, income, and

asset approaches to valuation and may employ a weighted average of the results of those

approaches if the evidence supports such averaging, there is no suggestion in the statutes

that the General Assembly meant to require that approach. We have no hesitation in

understanding instead a legislative intent that the value of the going concern be determined

by any valuation technique generally recognized in the business and financial community

and shown to be relevant to the circumstances of the particular company at issue. We hold,

in sum, that in a[n] * * * appraisal proceeding the dissenting shareholder is entitled to the

C. DISSOLUTION

Even if a corporation is chartered with perpetual existence, its life may still

be terminated if the directors and a majority of shareholders agree to do so.

Incorporation statutes usually provide for both voluntary and involuntary

dissolution.

*** Chapter Outcome***

Identify the ways by which voluntary and involuntary dissolution may occur.

Voluntary Dissolution

Requires two steps: (1) the board must pass a resolution to dissolve the

corporation and (2) the resolution must be approved by the holders of a

majority of the shares of the corporation entitled to vote at a shareholders’

meeting duly called for this purpose. Shareholders usually have no right to

dissent and no appraisal remedy. In addition, in many States dissolution

without action by the directors may be e&ected by unanimous consent of the

shareholders.

Involuntary Dissolution

Is of two kinds:

Administrative dissolution — the secretary of state dissolves a

corporation that has not met certain required formalities.

Judicial dissolution — a court orders dissolution in an action that may be

initiated by the state attorney general, a shareholder, or a creditor.

CASE 36-3

COOKE v. FRESH EXPRESS FOODS CORPORATION, INC.

Court of Appeals of Oregon, 2000

169 Ore.App. 101, 7 P.3d 717

http://scholar.google.com/scholar_case?q=7+P.3d+717+&hl=en&as_sdt=2,34&case=18255907503494215009&scilh=0

Armstrong, J.

Terry J. Cooke (plaintiff) is the former husband of defendant, Joni Quicker (Joni); defendant

Allen John Quicker (John) is Joni’s father. In the early 1980s John and Joni began a business

distributing fresh produce. Plaintiff soon left his job and began working with John and Joni

full time. The business was originally a partnership, with John having a half interest and Joni

and plaintiff together having the other half interest. The business grew throughout the 1980s.

Fresh Express was the primary source of income for all three parties. Part of that income

came from their salaries, but substantial additional amounts came as loans that the

corporation made to them for various purposes, including paying their individual taxes on

their portions of the corporation’s retained earnings. Because Fresh Express elected to be a

subchapter S corporation, which for tax purposes does not pay taxes itself but passes its

income through to its shareholders, plaintiff and defendants were liable for taxes on those

retained earnings whether or not the corporation actually distributed them. Without the

loans, they would have had no corporate money to pay the taxes on that corporate income.

Joni and plaintiff separated at about the time of the incorporation. The tension between

them increased significantly beginning in June 1993 when, after starting a relationship with

a Fresh Express employee, plaintiff filed for dissolution of the marriage.

Plaintiff managed the company’s delivery system, which included supervising the

operation of its trucks. In December 1993, while plaintiff was on vacation, John discovered

a notice on plaintiff’s desk from the Public Utilities Commission (PUC) that showed

The court entered a judgment dissolving plaintiff’s and Joni’s marriage in August 1994,

awarding Joni approximately $27,000. Because the corporation had never issued any stock

certificates, Joni was unable to use plaintiff’s ownership interest in the corporation to satisfy

the court judgment. In order to provide Joni a stock certificate to garnish, John called a

directors’ meeting for November 2, 1995, for the purpose of electing officers. At the meeting

John and Joni first reelected John as president and Joni as vice-president; then they also

elected Joni as secretary and treasurer. Plaintiff abstained from all three votes. A few days

later Joni issued a stock certificate to plaintiff. Instead of sending the certificate to plaintiff,

she immediately delivered it to the sheriff under a writ of garnishment on her judgment

against plaintiff.

In September 1996, defendants called a special shareholders’ meeting, at which they

reduced the number of directors to two, over plaintiff’s dissenting vote, and elected John and

Joni to those positions. During an informal discussion, plaintiff asked John’s attorney if the

company intended to pay the considerable amount of money it owed to him. After consulting

with John, the attorney responded that John had decided not to make any more distributions

[The plaintiff brought suit against the corporation, John, and Joni. The trial court found

that John would not have terminated Joni for a comparable error. It concluded that the

purpose for firing plaintiff was to exclude him from participating in the corporate business

or receiving any benefits from the corporation. The court found that the reason for the

exclusion was the breakdown of the marriage and the animosities that followed. The trial

Plaintiff argues that these actions together constituted a course of oppressive conduct and

that defendants breached their fiduciary duties to him by freezing him out of all participation

in the corporation and depriving him of all of the benefits of being a stockholder. ORS

60.661(2)(b) provides that a court may dissolve a corporation when the directors or those in

control “have acted, are acting or will act in a manner that is illegal, oppressive, or

fraudulent[.]” Although there is not, and probably cannot be, a definitive definition of

[Citation.] A finding that the majority shareholders have engaged in oppressive conduct

under ORS 60.661 permits the court either to order a dissolution of the corporation or to

award lesser appropriate relief, including requiring the majority to buy out the minority’s

interest at a price that the court fixes. [Citation.] Because many things can constitute

oppressive conduct or a breach of fiduciary duties, what matters is not so much matching the

specific facts of one case to those of another but examining the pattern and intent of the

majority and the effect on the minority of those specific facts. [Citation.]

[Citation.] * * * In addition, the “abrupt removal of a minority shareholder from

positions of employment and management can be a devastatingly effective squeeze-out

technique.” [Citation.] Finally, majority shareholders may siphon off corporate wealth by

causing a corporation to pay the majority shareholders excessively high compensation, not

only in salaries but in generous expense accounts and other fringe benefits. * * *

The existence of one or more of these characteristic signs of oppression does not

necessarily mean that the majority has acted oppressively within the meaning of ORS

60.661(2)(b). Courts give significant deference to the majority’s judgment in the business

Finally, * * * defendants acted to ensure that they would permanently receive all benefits

of the corporation. They began by replacing plaintiff as a director and reducing the number

of directors to two. Although that was not necessarily improper in itself, their first actions as

the sole directors of Fresh Express showed their purpose to exclude plaintiff from any share

in the corporation other than his tax liabilities. They first removed defendant from any office

or agency with the corporation and then took a number of actions to direct all corporate

income to themselves. Despite having told plaintiff that there would be no corporate

distributions, defendants distributed the entire retained earnings through a paper transaction

that ensured that the corporate books would show no source for making any cash

distribution to plaintiff. They then more than doubled John’s salary, with the result that he

received his income from the corporation as an expense that would reduce its profits rather

than as a distribution of profits. Finally, they had the corporation pay for their recently

purchased automobiles, again adding to the corporation’s expenses and reducing its profits

for their benefit.

* * *

Under ORS 60.661, the trial court had the authority to choose a remedy for defendants’

actions; we agree with it that requiring defendants to purchase plaintiff’s shares is the

preferable option. A purchase will disentangle the parties’ affairs while keeping the

corporation a going concern; dissolution would not benefit anyone, and plaintiff did not seek

it at trial. * * *

* * *

Liquidation

Once a corporation is dissolved, it is required to wind up its a&airs and

liquidate its assets; proceeds are used first to pay the expenses of liquidation

Protection of Creditors

Statutory provisions protect creditors, often by requiring the corporation to

mail notice of dissolution to known creditors, to make a general publication