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

subject Type Homework Help
subject Pages 9
subject Words 3899
subject Authors Barry S. Roberts, Richard A. Mann

Unlock document.

This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
page-pf1
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
page-pf2
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 shareholders 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
page-pf3
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
shareholders 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 shareholders “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 shareholders pro rata share of the company as a whole,
without shareholder-level discounts for lack of control or lack of marketability. [Citations.]
page-pf4
“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 shareholders entitlement is significant in that it does not limit the remedy to the
fair market value of the dissenters 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 dissenters 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
page-pf5
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.
page-pf6
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 plaintiffs desk from the Public Utilities Commission (PUC) that showed
The court entered a judgment dissolving plaintiffs 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 plaintiffs ownership interest in the corporation to satisfy
page-pf7
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 plaintiffs 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
page-pf8
[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
page-pf9
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 plaintiffs 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

Trusted by Thousands of
Students

Here are what students say about us.

Copyright ©2022 All rights reserved. | CoursePaper is not sponsored or endorsed by any college or university.