§ 3.2 Access to Books and Records
§ 3.2.1 California
Farnum v. Iris Biotechnologies Inc., 86 Cal. App.5th 602 (2022). The court affirmed a trial court’s refusal to award plaintiff his reasonable expenses related to his demand for the inspection of defendant company’s records.
The plaintiff was a member of the company’s board of directors and owned approximately 8 percent of the company’s stock. Plaintiff requested an inspection of records related to the company’s acquisition of a subsidiary and financial documents following the acquisition. A month later, plaintiff, in his capacity as a member of the board and shareholder, petitioned for a writ of mandate directing the company to permit him to inspect and copy all corporate records. Before the hearing on the petition, the plaintiff was voted off the company’s board. The trial court denied the petition because plaintiff no longer had standing to inspect records due to his ejection from the board and because the records request was overly board and lacked a statement of purpose reasonably related to his interests as a shareholder. A few weeks later, plaintiff served a set of 31 inspection requests on the company, seeking to inspect a wide range of documents from both that company and its subsidiary. The company responded, indicating that certain documents, such as shareholder and board minutes, were not maintained and could not be produced and that audited financial statements from 2012 to 2014 had already been provided to plaintiff. The company indicated that the remaining requests were not permitted under California law and therefore no responsive documents would be produced. Plaintiff filed another petition for writ of mandate seeking to compel inspection and copying of corporate records in his capacity as a shareholder. The trial court denied both the petition and the associated request for an award of attorney fees. On appeal the court reversed part of the denial related to eight of plaintiff’s 31 document requests. As to those eight categories, plaintiff only had a right to inspect the records for four categories but only for the year 2014. For two categories relating to two separate corporate lawsuits plaintiff’s inspection rights were subject to the company’s right to withhold attorney-client privileged documents. In relation to the final two requests, the court gave plaintiff the right to inspect all “accounting records regarding the costs and professional fees incurred by [company] in creating [its subsidiary].” The court ruled that the trial court may award an amount to reimburse plaintiff on remand for his expenses incurred before the trial court and appeal. On remand, the trail court determined that “in light of all the relevant circumstances of this case, the court cannot say there is a showing that on the whole, [the company] acted without justification in refusing [plaintiff’s] inspection demands,” and denied plaintiff’s request for expenses. Plaintiff timely appealed.
Corporate Code § 1604 allows courts to award reasonable expenses to plaintiffs who successfully enforce shareholder inspection rights if a corporation’s failure to comply was without justification. “Without justification” was not defined in section 1604. The court ruled that if there was “substantial justification” to refuse to produce documents, which means that “a justification … is well grounded in both law and fact,” a court need not award expenses to successful plaintiffs. Because the prior appeal established that a majority of plaintiff’s records requests lacked merit, the court determined the trial court did not abuse its discretion in rejecting plaintiff’s expense request and affirmed the trial court’s decision.
§ 3.3 Business Judgment Rule
§ 3.3.1 Minnesota
Schneider v. Schmidt, No. A22-1305, 2023 WL 4861787 (Minn. Ct. App. July 31, 2023), review denied (Nov. 14, 2023). Appellant, minority owner of an LLC, brought suit in her individual capacity against the LLC and its majority owner following the LLC’s liquidation. The district court determined that all of appellant’s claims, other than a claim for failure to comply with notice requirements, were derivative claims. Appellant subsequently made a demand on the LLC pursuant to the derivative claims, and the LLC appointed a special litigation committee (SLC). The SLC declined to pursue the derivative claims because it determined that doing so was not in the LLC’s best interest. The district court granted summary judgment in appellant’s favor as to the failure to comply with notice requirements, finding that appellant had not been given proper notice regarding dissenter’s rights prior to the sale of the LLC’s assets. Damages were later determined at trial.
On appeal, the LLC argued that the district court should not have awarded damages, but instead deferred to the SLC’s determination of how the LLC should treat its own debts and obligations under the business judgment rule. The Minnesota Court of Appeals affirmed. The Court held that “Courts only defer to an SLC’s decision, under the business judgment rule, on a derivative claim,” and that an SLC must analyze each specific claim to earn deference under the rule. Because appellant’s claim as to failure to comply with notice requirements was a direct claim, and the SLC did not investigate or analyze that claim, there was no deference owed to the SLC under the business judgment rule.
For further discussion of Schneider v. Schmidt, see also sections herein regarding jurisdiction, venue, and standing.
§ 3.3.2 New Jersey
Care One, LLC v. Straus, No. A-1215-20, 2022 WL 17072371 (N.J. Super. Ct. App. Div. Nov. 18, 2022), cert. denied, 255 N.J. 379, 301 A.3d 1281 (2023), and cert. denied, 255 N.J. 387, 301 A.3d 1287 (2023), and cert. denied, 255 N.J. 394, 301 A.3d 1290 (2023). The Court held that proposed third-party claims for aiding and abetting an alleged breach of fiduciary duty could not be brought under New Jersey law. Because the fiduciary duties arose under an LLC Agreement governed by Delaware law, New Jersey law was not proper choice of law to apply in determining whether that claim was time-barred. Civil conspiracy claims were similarly barred because civil conspiracy is not an independent claim and must instead be attached to the underlying wrong. Here, the underlying wrong was associated with the Delaware LLC Agreement. Therefore, both claims were barred as being governed by the Agreement’s choice of Delaware law, rather than New Jersey law.
§ 3.4 Dissolution
§ 3.4.1 Utah
Ellis v. La Val Enterprises Ltd., 523 P.3d 208 (Utah App. Dec. 8, 2022). The court of appeals found that that selling the partnership’s property—a family farm—was not effectively a dissolution because a stated purpose of the partnership was buying and selling real property. The partnership was formed for the management of a family farm with the parents as the general partners and the children as the limited partners. When the father died, and with the mother’s health declining, one of the children, who was a limited partner, entered into an agreement to purchase the partnership’s property. The other siblings sued, claiming that the mother, as general partner, did not have the authority to sell the property without the consent of all limited partners because selling the farm was effectively dissolving the partnership, and the partnership agreement prevents the general partner from undertaking any act which would make it impossible to carry on the ordinary business of the partnership. The court disagreed, finding that the stated purpose of the partnership expressly included buying, holding, and selling real property. If the property was sold, the proceeds would go to the partnership, and it would be no different than buying and selling different assets. Selling the farm was not an act that dissolved or liquidated the partnership because of the express purpose of the partnership.
§ 3.5 Jurisdiction, Venue, and Standing
§ 3.5.1 California
Kandter v. Reed, Cal. App.5th 191 (2023). Shareholders brought derivative action against board of directors and officers of California corporation, and against corporation as nominal defendant, relating to leak from corporation’s underground natural gas storage facility, and alleging that directors and officers breached their fiduciary duties by acting recklessly or with gross negligence in failing to take steps for adequate inspection, documentation, monitoring, and risk management. Corporations Code § 800(b)(2) requires a shareholder bringing a derivative action to allege “with particularity” the “efforts [made] to secure from the board such action as [the shareholder] desires, or the reasons for not making such effort ....” Plaintiffs did not serve a demand on the board prior to filing suit. Instead, they alleged that it would be futile to do so. The trial court sustained defendants’ demurrer with leave to amend, finding that plaintiffs failed to sufficiently allege that serving a demand on the board would have been futile. Plaintiffs amended the complaint, but the trial court again determined plaintiffs failed to sufficiently allege demand futility. At a subsequent hearing, plaintiffs indicated they would not seek leave to amend. The trial court issued a dismissal from which plaintiffs timely appealed.
In reviewing the allegations to support demand futility, courts must be able to determine on a director-by-director basis whether each possesses independence or disinterest such that he or she may fairly evaluate the challenged transaction. “Where ‘the board that would be considering the demand did not make a business decision which is being challenged in the derivative suit’ (Rales v. Blasband (Del. 1993) 634 A.2d 927, 933–934), the Rales test asks whether ‘the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. If the derivative plaintiff satisfies this burden, then demand will be excused as futile’.” (Citation omitted.) As alleged, and contrary to plaintiffs’ allegations that there was no reporting mechanism in place for safety issues regarding gas storage, the board formed a committee that provided regular reports to the board, and whose purpose included, among other things, monitoring storage infrastructure for safety. The board received annual risk management reports. As such, this board did not make a business decision that is challenged by plaintiffs and the Rales test applied. Here, plaintiffs were found not to have alleged particularized facts supporting their theory of liability, and thus have failed to plead demand futility as required under section 800(b)(2). The dismissal was affirmed.
§ 3.5.2 Colorado
Electro-Mechanical Products, Inc. v. Alan Lupton Ass’s., Inc., 663 F. Supp.3d 1227 (D. Colo. 2023). Closely held corporation and shareholders filed suit against one minority shareholder and the consulting company for which he was principal shareholder, officer, and director, claiming breach of fiduciary duty and breach of the duty of loyalty by failing to renegotiate a contract, in which consulting company agreed to provide its best efforts to promote closely-held corporation’s sales of its services and products, and by failing to vote in favor of sale of closely held corporation to potential buyer. The potential buyer conditioned the sale on the termination of the consulting agreement. Minority shareholder moved to dismiss for failure to state claim and for lack of standing.
Minority shareholder argued that plaintiffs’ claims against him should be dismissed because he did not owe fiduciary duties to the closely held corporation or its other shareholders because he was only an 8.9 percent shareholder of a closely held corporation. No Colorado case has directly addressed whether minority shareholders in a closely held corporation owe fiduciary duties. The court predicted that the Colorado Supreme Court would not find that a minority shareholder who did not exercise control over the corporation and who is alleged to have acted in his own contractual interests to the detriment of other shareholders owed fiduciary duties to other shareholders. Here, the complaint did not allege that the minority shareholder had the ability to control the closely held corporation. It only alleged that the minority shareholder was able to prevent the sale to potential buyer because of a condition imposed by the potential buyer, not due to any control the minority shareholder may have had. Moreover, the fact that minority shareholder was the principal stockholder, officer, and director of the consulting company did not create a fiduciary duty, or a conflict of interest, requiring him to renegotiate the terms of the consulting contract or vote in favor of the sale. The minority shareholder had no fiduciary duty to act against his economic self-interest given that there are no allegations that he controlled the board of directors or controlled the other shareholders such that he could direct the business of the corporation. The Court granted the motion to dismiss.
Li v. Colo. Reg. Cntr. I, LLC, 2022 WL 5320135 (D. Colo. Oct. 7, 2022). Two sets of foreign investors asserted several actions against a Colorado LLLP, its general partner and others related to the partnership investments. The Colorado LLLP served as an EB-5 Regional Center, an entity approved by the federal government to promote economic growth by encouraging investments by foreign persons in exchange for permanent resident cards (green cards). As described in Liu v. SEC, 140 S. Ct. 1936, 1941 (2020), “[t]he EB-5 Program, administered by the U.S. Citizenship and Immigration Services, permits noncitizens to apply for permanent residence in the United States by investing in approved commercial enterprises that are based on proposals for promoting economic growth.” Although the lawsuits involved federal and state securities and common law claims, the focus of this summary relates to the breach of fiduciary duty claims against the general partner.
The first set of foreign investors brought a derivative-breach-of-fiduciary-duty claim against the general partner. They alleged that the general partner failed to adequately ensure that a loan the partnership issued was sufficiently collateralized and that the general partner failed to demand complete repayment of the loan and by providing misleading information about it. The second set of foreign investors separately brought both direct and derivative breach-of-fiduciary-duty claims against the general partner, alleging that the general partner provided them with misleading marketing materials and took advantage of the investors lack of English proficiency to convince them to invest in the limited partnership. These claims were dismissed under Colorado’s economic loss rule and the contemporaneous ownership rule, under Federal Rule of Civil Procedure 23.1(b). Under the economic loss rule, if a plaintiff alleges only economic loss from the breach of an express or implied contractual duty, the plaintiff may not assert a tort claim for such a breach absent an independent duty of care under tort law. The contemporaneous ownership rule provides that a plaintiff bringing a derivative action must allege that he or she “was a shareholder or member at the time of the transaction complained of.” Fed. R. Civ. P. 23.1(b). Under Colorado’s limited partnership statue, “member” means a general partner or a limited partner. The complaint was deemed not subject to the economic loss rule because it alleged that the fiduciary relationship arose from contract; so, the court determined that they were contract claims and not subject to the economic loss rule. But to the extent their claims were based on pre-investment misrepresentations, they were dismissed because the alleged malfeasance occurred before the investors became “members” of the partnership in violation of the contemporaneous ownership rule. The second set of investors, however, failed to allege a contractual breach of fiduciary duty claim without establishing an independent source of fiduciary duty and was subject to the economic loss rule.
Weinreis Ethanol, LLC v. Kramer, 2022 WL 17986754 (D. Colo. Dec. 29, 2022). Plaintiffs, certain members and investors of an LLC that produced ethanol and distilled wet grain (Company), sued two of the four managers of the Company’s board of managers (Kramer and Bornhoft) and who also founded and owned a separate LLC that managed the Company (Management Company) pursuant a management agreement with the Company along with the general manager of the Company along with the Management Company. The crux of this suit is that Kramer and Bornhoft, individually and through the Management Company, improperly diverted Company profits that otherwise would have been distributed to plaintiffs. Kramer, in collaboration with Bornhoft, were alleged to have taken Company funds for Kramer’s “own use and/or used such funds to pay for or reimburse dues, fees, marketing and advertising, and sponsorship expenses for … personal race car teams.” Defendants allegedly caused the Company to pay “inflated, over-market prices” for enzymes and other products to produce ethanol from various suppliers who sponsored one of Kramer’s personal racing teams. Plaintiffs asserted: breach of operating agreement (against Kramer and Bornhoft); intentional interference with existing and prospective business relations (against the Management Company); breach of fiduciary duties (against Kramer and Bornhoft); aiding and abetting breach of fiduciary duties (against Bornhoft and the Management Company); civil theft (against Kramer and Bornhoft); and a claim for access to books and records. Kramer, Bornhoft, and Management Company moved to dismiss all but the records claim. Among other arguments, defendants argue that plaintiffs had no standing to pursue damages because the alleged harms were suffered by Company and must be brought as a derivative action.
The court rejected this dismissal argument. Colorado precedent (Tisch v. Tisch, 439 P.3d 89 (Colo. App. 2019)) addressing a similar standing issue with a corporation was applied here. Tisch concluded that the minority shareholders had “a distinct, proprietary interest in their share of … undeclared distributions that allowed them to bring an individual claim against [a majority shareholder] for civil theft.” In this case, by alleging that defendants have diverted profits that should have been distributions, plaintiffs have standing to proceed on their direct claims for damages.
§ 3.5.3 Delaware
Central Am. Mezzanine Infrastructure Fund L.P. v. Lopez, C.A. No. 2022-0408-KSJM (Del. Ch. Dec. 14, 2022) (ORDER). The Court of Chancery refused to dismiss or stay an action brought to determine the proper managing members of a LLC based on forum non conveniens grounds, even where two other first-filed lawsuits were being litigated over substantially similar issues in both Belgium and Mexico. The Court held that, although the other lawsuits unquestionably were first-filed and related to the same subject matter as the subject lawsuit, a stay or dismissal was inappropriate because the Belgian court was looking to the Delaware court to decide the question of the proper management of the company and the Court of Chancery is the proper arbiter of the fate of Delaware entities.
In re P3 Health Group Holdings, LLC, 285 A.3d 143 (Del. Ch. 2022). The Court of Chancery held that it could properly exercise personal jurisdiction over a defendant as a de facto manager of the subject company, even though defendant was not a formal manager and held no official role with the company. The Court, however, held that it could properly exercise jurisdiction over defendant where he made decisions on behalf of the company, directed management to take certain actions, instructed the company’s advisors to perform work without authorization from management, berated the company’s outside counsel for not running documents by him before sending them out, and enjoyed access to information that even formal managers of the company did not have.
§ 3.5.4 Minnesota
Schneider v. Schmidt, No. A22-1305, 2023 WL 4861787 (Minn. Ct. App. July 31, 2023), review denied (Nov. 14, 2023). Appellant, the minority owner of an LLC, brought suit in her individual capacity against the LLC and its majority owner after the LLC’s liquidation. The appellant alleged unfairly prejudicial conduct, breach of fiduciary duty, failure to comply with notice requirements, and breach of both the operating agreement and the member-control agreement. The district court found that the claims for unfairly prejudicial conduct, breach of fiduciary duty, and breach of the member-control agreement were derivative claims and granted summary judgment in favor of the majority owner-respondent.
On appeal, the Minnesota Court of Appeals found that the claims for unfairly prejudicial conduct and breach of fiduciary duty were direct claims because appellant alleged direct and personal harm because the majority owner-respondent made unauthorized payments with the proceeds of the LLC’s asset sale, using those proceeds to pay a promissory note and loan agreement that the respondent was personally liable for. As to the breach of the member-control agreement, the Court of Appeals found that this was also a direct claim because the member-control agreement was an agreement between the LLC’s members. Because the LLC was not a party to the member-control agreement, it was not harmed by the breaches of the agreement. Appellant was personally harmed because the member-control agreement specified the rights and obligations of members thereunder, including provisions as to liquidation of the LLC and the distribution of proceeds from that liquidation. The harm under these three claims accrued directly to the appellant, rather than the LLC, thus making them appropriate direct claims.
For further discussion of Schneider v. Schmidt, see also sections herein regarding the business judgment rule.
§ 3.5.5 Texas
Bay Area RV Parks, L.L.C. v. WGB RV Parks, LLC, 2023 WL 2248738 (Tex. Ct. App. Feb. 28, 2023). In a dispute between business partners, the Court of Appeals drew a distinction between allocations and distributions in interpreting an LLC’s operating agreement, finding that that a member was not entitled to preferential distributions upon the sale of the company’s assets. The business, which operated three RV parks, brought in plaintiff as a new member, who purchased 25 percent of the membership interest for $500,000. The membership then executed a new operating agreement, which included a provision whereby upon the sale of the business’s property, the profits of the sale “shall be allocated first to return the unreturned capital contribution of a member.” The company sold its real property, and the 25 percent interest holder demanded preferential distribution to repay its $500,000 capital contribution. The court of appeals disagreed with the trial court, finding that the provision at issue was concerning allocation, not distribution. Allocation refers to how profits and losses are divided among the company’s members, typically for tax purposes, while distributions refer to a member’s receipt of money from the company. The court found that the 25 percent interest holder was not entitled to the first $500,000 of the profits from the sale; rather, it was entitled to 25 percent of whatever distributions were made by the company during the winding up.
§ 3.6 Claims and Issues in Business Divorce Cases
§ 3.6.1 Alternative Entities
§ 3.6.1.1 Delaware
Central Am. Mezzanine Infrastructure Fund L.P. v. Lopez, C.A. No. 2022-0408-KSJM (Del. Ch. Dec. 14, 2022) (ORDER). The Court of Chancery determined that an LLC Agreement that provided for the removal of the LLC’s managing member at any time for any reason by Plaintiff was unambiguous. The Court accordingly determined that Plaintiff’s removal of Defendant under the LLC Agreement was effective. The members of the LLC, an investment fund and an operator of port terminals, began to do business together whereby the investment fund provided financing to port terminals that were in severe financial distress in exchange for a membership interest and provisions in the LLC Agreement permitting the investment fund to remove defendant as managing member at any time for any reason, as well as a call option providing the right to purchase 90–95 percent of the subject company’s equity for $10,000.
Defendant understood those rights to be extant only to the extent that Plaintiff’s loans were outstanding. Once the payment of the loans was complete, however, Plaintiff removed Defendant as managing member and invoked the call option. The Court of Chancery determined that, because the LLC Agreement did not make the removal right or the call option contingent on any occurrence, including the payment of the loans, such rights were absolute.
§ 3.6.1.2 Texas
Bay Area RV Parks, L.L.C. v. WGB RV Parks, LLC, 2023 WL 2248738 (Tex. Ct. App. Feb. 28, 2023). In a dispute between business partners, the Court of Appeals drew a distinction between allocations and distributions in interpreting an LLC’s operating agreement, finding that that a member was not entitled to preferential distributions upon the sale of the company’s assets. The business, which operated three RV parks, brought in plaintiff as a new member, who purchased 25 percent of the membership interest for $500,000. The membership then executed a new operating agreement, which included a provision whereby upon the sale of the business’s property, the profits of the sale “shall be allocated first to return the unreturned capital contribution of a member.” The company sold its real property, and the 25 percent interest holder demanded preferential distribution to repay its $500,000 capital contribution. The court of appeals disagreed with the trial court, finding that the provision at issue was concerning allocation, not distribution. Allocation refers to how profits and losses are divided among the company’s members, typically for tax purposes, while distributions refer to a member’s receipt of money from the company. The court found that the 25 percent interest holder was not entitled to the first $500,000 of the profits from the sale; rather, it was entitled to 25 percent of whatever distributions were made by the company during the winding up.
§ 3.6.2 Breach of Fiduciary Duty
§ 3.6.2.1 Colorado
Li v. Colo. Reg. Cntr. I, LLC, 2022 WL 5320135 (D. Colo. Oct. 7, 2022). Two sets of foreign investors asserted several actions against a Colorado LLLP, its general partner and others related to the partnership investments. The Colorado LLLP served as an EB-5 Regional Center, an entity approved by the federal government to promote economic growth by encouraging investments by foreign persons in exchange for permanent resident cards (green cards). As described in Liu v. SEC, 140 S. Ct. 1936, 1941 (2020), “[t]he EB-5 Program, administered by the U.S. Citizenship and Immigration Services, permits noncitizens to apply for permanent residence in the United States by investing in approved commercial enterprises that are based on proposals for promoting economic growth.” Although the lawsuits involved federal and state securities and common law claims, the focus of this summary relates to the breach of fiduciary duty claims against the general partner.
The first set of foreign investors brought a derivative-breach-of-fiduciary-duty claim against the general partner. They alleged that the general partner failed to adequately ensure that a loan the partnership issued was sufficiently collateralized and that the general partner failed to demand complete repayment of the loan and by providing misleading information about it. The second set of foreign investors separately brought both direct and derivative breach-of-fiduciary-duty claims against the general partner, alleging that the general partner provided them with misleading marketing materials and took advantage of the investors lack of English proficiency to convince them to invest in the limited partnership. These claims were dismissed under Colorado’s economic loss rule and the contemporaneous ownership rule, under Federal Rule of Civil Procedure 23.1(b). Under the economic loss rule, if a plaintiff alleges only economic loss from the breach of an express or implied contractual duty, the plaintiff may not assert a tort claim for such a breach absent an independent duty of care under tort law. The contemporaneous ownership rule provides that a plaintiff bringing a derivative action must allege that he or she “was a shareholder or member at the time of the transaction complained of.” Fed. R. Civ. P. 23.1(b). Under Colorado’s limited partnership statue, “member” means a general partner or a limited partner. The complaint was deemed not subject to the economic loss rule because it alleged that the fiduciary relationship arose from contract; so, the court determined that they were contract claims and not subject to the economic loss rule. But to the extent their claims were based on pre-investment misrepresentations, they were dismissed because the alleged malfeasance occurred before the investors became “members” of the partnership in violation of the contemporaneous ownership rule. The second set of investors, however, failed to allege a contractual breach of fiduciary duty claim without establishing an independent source of fiduciary duty and was subject to the economic loss rule.
Weinreis Ethanol, LLC v. Kramer, 2022 WL 17986754 (D. Colo. Dec. 29, 2022). Plaintiffs, certain members and investors of an LLC that produced ethanol and distilled wet grain (Company), sued two of the four managers of the Company’s board of managers (Kramer and Bornhoft) and who also founded and owned a separate LLC that managed the Company (Management Company) pursuant a management agreement with the Company along with the general manager of the Company along with the Management Company. The crux of this suit is that Kramer and Bornhoft, individually and through the Management Company, improperly diverted Company profits that otherwise would have been distributed to plaintiffs. Kramer, in collaboration with Bornhoft, was alleged to have taken Company funds for Kramer’s “own use and/or used such funds to pay for or reimburse dues, fees, marketing and advertising, and sponsorship expenses for … personal race car teams.” Defendants allegedly caused the Company to pay “inflated, over-market prices” for enzymes and other products to produce ethanol from various suppliers who sponsored one of Kramer’s personal racing teams. Plaintiffs asserted several claims including breach of fiduciary duties (against Kramer and Bornhoft) and aiding and abetting breach of fiduciary duties (against Bornhoft and the Management Company). Defendants moved to dismiss several asserted claims, including breach of fiduciary duty and aiding and abetting breach of fiduciary duty. Among other arguments, defendants argued that plaintiffs’ breach of fiduciary duties and aiding and abetting claims fail because all duties not expressly set forth in the Company operating agreement have been disclaimed, so no fiduciary duties are owed.
The operating agreement explicitly described the duties and obligations of Company managers to include: conducting the Company’s business and operations, and taking actions “necessary or appropriate (i) for the continuation of the Company’s valid existence as a limited liability company … and (ii) for the accomplishment of the Company’s purposes, including the acquisition, development, maintenance, preservation, and operation of Property in accordance with the provisions of this Agreement and applicable laws and regulations.” The operating agreement stated that such duties were to be discharged “in good faith,” and that managers “shall be under no other duty (fiduciary or otherwise) to the Company or the Members to conduct the affairs of the Company in a particular manner.” Since Colorado law allows for the express disclaimer of duties in an operating agreement, including fiduciary duties, the Court agreed with defendants that any fiduciary duties were disclaims. Without a fiduciary duty, the breach of fiduciary duty and aiding and abetting claims could not survive and were dismissed.
§ 3.6.2.2 Texas
Peek v. Mayfield, 2023 WL 5967886, at *1 (Tex. App. Sept. 14, 2023). In a trust dispute, the trial court found that the trustee breached his fiduciary duties to the trust due to self-dealing and undue influence and appointed a receiver to replace the trustee. Specifically, the trial court found that the trustee unduly influenced his mother to assign certain assets away from the trust. On appeal, the trustee argued that there was insufficient evidence for the trial court to find that he breached his fiduciary duties to the trust. The court pointed to the evidence presented at trial that the trustee transferred interest in certain trust assets to the trustee’s own trust. This self-dealing transaction gave rise to an unfairness presumption, and the trustee had the burden to prove otherwise. The record did not reflect any evidence addressing this presumption or showing that the trustee transferred assets to his own trust in the best interest of the trust’s beneficiaries.
§ 3.6.3 Civil Theft
§ 3.6.3.1 Colorado
Weinreis Ethanol, LLC v. Kramer, 2022 WL 17986754 (D. Colo. Dec. 29, 2022). Plaintiffs, certain members and investors of an LLC that produced ethanol and distilled wet grain (Company), sued two of the four managers of the Company’s board of managers (Kramer and Bornhoft) and who also founded and owned a separate LLC that managed the Company (Management Company) pursuant a management agreement with the Company along with the general manager of the Company along with the Management Company. The crux of this suit is that Kramer and Bornhoft, individually and through the Management Company, improperly diverted Company profits that otherwise would have been distributed to plaintiffs. Kramer, in collaboration with Bornhoft, was alleged to have taken Company funds for Kramer’s “own use and/or used such funds to pay for or reimburse dues, fees, marketing and advertising, and sponsorship expenses for … personal race car teams.” Defendants allegedly caused the Company to pay “inflated, over-market prices” for enzymes and other products to produce ethanol from various suppliers who sponsored one of Kramer’s personal racing teams. Plaintiffs asserted several claims, including civil theft under C.R.S. § 18-4-405 (against Kramer and Bornhoft). Defendants moved to dismiss several asserted claims, including civil theft. Among other arguments, defendants argue that the civil theft claim fails because plaintiffs do not have a proprietary interest in undeclared distributions, and because plaintiffs have failed to plead that Kramer or Bornhoft took property by theft, robbery, or burglary.
The court rejected these dismissal arguments. In Tisch v. Tisch, 439 P.3d 89 (Colo. App. 2019), a Colorado appellate court ruled that the minority shareholders had “a distinct, proprietary interest in their share of … undeclared distributions that allowed them to bring an individual claim against [a majority shareholder] for civil theft.” And, since the civil theft statute does not define theft, robbery, or burglary, these terms are understood within the broader criminal statutory framework. So “[a] person commits theft when he or she knowingly obtains, retains, or exercises control over anything of value of another without authorization or by threat or deception.” C.R.S. § 18-4-401(1). By alleging that defendants have diverted profits that should have been distributions, plaintiffs have alleged a civil theft claim.
§ 3.6.4 Fraud
§ 3.6.4.1 Arizona
Ferneau v. Wilder, 256 Ariz. 68, 535 P.3d 554 (Ariz. Ct. App. 2023). This action involved a contentious dispute between co-directors of a corporation called Total Accountability Systems I, Inc. (“TAS”), an Arizona non-profit corporation that held a certificate to operate a medical marijuana dispensary. Johnny Ferneau unsuccessfully appealed from the trial court’s order removing him as a director of TAS and sanctioning him, for discovery violations, by dismissing his complaint against his co-director Kristine Wilder. The court of appeals concluded that the trial court did not err in removing Mr. Ferneau as a director of TAS because he engaged in “fraudulent conduct” under A.R.S. § 10–3810(A), which, despite Mr. Ferneau’s assertion, includes both actual and constructive fraud. In pertinent part, Mr. Ferneau alleged that Ms. Wilder denied him access to TAS’s books and records, including access to TAS’s email account (“Account”). Ms. Wilder countered that she did not have access to the Account, rather she requested access from Mr. Ferneau, which he refused to provide, and she informed the trial court of her concern that Mr. Ferneau would destroy the emails in TAS’s Account. At a pretrial conference, the trial court reminded the parties of their duty to preserve relevant evidence. Litigation ensued for years, and the trial court later found that Mr. Ferneau had “intentionally deleted the contents of the Account,” with TAS losing four years’ worth of business emails. The trial court found, and the appellate court affirmed, that this constituted fraudulent activity against TAS, a corporation toward which Mr. Ferneau owed a fiduciary duty. Accordingly, the court found, and the appellate court affirmed, that the removal of Mr. Ferneau as a director of TAS, pursuant to A.R.S. § 10–3810(A), was in TAS’s bests interests because he had engaged in “solely self-serving” conduct.
§ 3.6.5 Equitable/Statutory Relief
§ 3.6.5.1 Colorado
Air Solutions, Inc. v. Spivey, 2023 COA 14. A newly formed corporation and its sole shareholder brought a declaratory judgment action against its CFO to declare that the CFO was not an owner of the corporation. CFO countersued for breach of contract and fraud against the corporation and shareholder for refusing to make the CFO a 50 percent owner of the corporation and sought specific performance of the agreement to sell shares to the CFO along with other equitable types of relief, including a declaration that CFO was an owner of the corporation. A jury trial was conducted on only the CFO’s fraud and contract claims before the court addressed all other equitable claims and remedies. The jury found in favor of the CFO’s breach of contract counterclaim. After trial, the CFO asked the court for a decree of specific performance on the breach of contract counterclaim and for declaratory relief, arguing, among other things, that the nature of the contract rendered an award of damages inadequate to compensate him for the benefit of his bargain. The court denied the request for specific performance and the remaining declaratory judgment and equitable counterclaims.
On appeal, the appellate court concluded that the trial court was wrong in denying the CFO’s request for a decree of specific performance and that the CFO is entitled to a decree of specific performance against sole shareholder on the contract and that the trial court erred by denying the CFO’s counterclaims for declaratory judgment against both the sole shareholder and the corporation, though on remand the trial court will need to determine the precise terms of any such declaration.
§ 3.6.5.2 Delaware
Bighorn Ventures Nevada, LLC v. Solis, 2022 WL 17948659 (Del. Ch. Dec. 23, 2022). The Court of Chancery declined to enter an order appointing a receiver or custodian, holding that the subject nominal defendant corporation was not deadlocked, was not clearly insolvent—and even if it was, no special circumstances existed—and no equitable considerations required the appointment of a receiver or custodian. Plaintiff, nominal defendant’s largest shareholder, brought an action seeking appointment of a receiver or custodian on the grounds that it believed that nominal defendant was on “precarious financial footing” requiring an infusion of cash that Plaintiff believed only it could provide. The Board, however, was split 2:2 on accepting the cash infusion on the terms offered by Plaintiff in lieu of some other form of financing. The Court held that appointment of a receiver or custodian was not appropriate under 8 Del. C. § 226 because a tie-breaking director could be appointed to the board via stockholder vote under the company’s charter. The Court further held that appointment of a receiver or custodian under 8 Del. C. § 291 was not appropriate because the company was not clearly insolvent and, in any event, no special circumstances existed to warrant such extraordinary relief. Finally, the Court held that no equitable considerations required such an appointment either.
§ 3.7 Valuation and Damages
§ 3.7.1 Colorado
Snyder v. Montgomery, 2022 Colo. Dist. LEXIS 1071 (Larimer County, Colo. Oct. 4, 2022) (Order). This case involves a dispute regarding whether a minority discount should be applied in determining the buyout value for the decedent’s minority ownership interest subject to a shareholders’ agreement which required the shares to be sold to the remaining shareholder at “fair market value.” The decedent’s estate filed a motion seeking a determination of law that a minority discount is not applicable. The Court distinguished this case from others in which courts decided the appropriateness of a minority discount. Rather, the Court found that in this case the issue is whether fair market valuation does not include a minority discount. The Court reviewed the shareholders’ agreement, concluded that the term “fair market valuation” written into the shareholders’ agreement is not an ambiguous term, and declined to read into the definition “requiring or forbidding any valuation approaches like the minority discount.”
§ 3.7.2 Connecticut
Buccieri v. New Hope Realty, Inc., 2022 Conn. Super. LEXIS 2230 (Oct. 20, 2022). This case involves a corporate dissolution that was initiated after the parties could not agree on the management and operation of a realty company. The defendants elected to purchase the plaintiff’s fifty percent ownership interest but agreement regarding the value of plaintiff’s shares could not be reached. The Court heard expert witness testimony from real estate appraisers and business appraisers. The Court determined that the moving party who applied for Court to “evaluate” the shares has the burden of proof. Furthermore, the Court considered what is the standard of value and whether discounts of lack of marketability and lack of control apply. In this case, the Court found that the shareholders’ agreement specified standard of “fair market value” was not determinative because the shares had not been offered for sale. In addition, the Court found that the applicable Connecticut buyout statute required the application of the fair value standard and that because “purchase of plaintiff’s fifty percent shares by the defendants confers complete control of the … company…any minority discount is inappropriate here.” Also, the Court found that a discount for lack of control is not applicable in a statutory buyout in which no third party is entailed.
§ 3.7.3 Florida
WL Alliance LLC, Plaintiff-Appellee, v. Precision Testing Group Inc., Glenn Stuckey, Defendants Appellants, 2022 U.S. App. LEXIS 35298; 2022 WL 17830257 (11th Cir. Dec. 21, 2022). This case involves a partnership termination dispute between two companies who had formed a partnership to provide technician serves to an energy utility company. The partners had agreed to split profits equally (50–50) each quarter. However, a dispute arose regarding accounting and payments of the profit split, and the partnership was terminated. One of the partner companies—the defendant company—attempted to replace the partnership with a new entity to enter into a new agreement with the energy utility company which would in effect cut out the original other partner—the plaintiff. The plaintiff filed claims of wrongful disassociation, breach of partnership agreement and lost profits damages against the defendant. A jury trial found the defendant liable for damages and made an award. Defendant appealed asserting that the damage award “included damages for lost future profits that were not ‘reasonably certain, and that the damage awards were not supported by the evidence because there was no accounting.”
On appeal, the Court reviewed whether there was sufficient evidence to support the award of future damages. It found that although Florida law requires that causation of lost profits damages must be proven with “reasonable certainty,” that once causation has been proven, the quantification of damages needs only to be judged by a reasonable “yardstick.” Defendant claimed that the contract the partnership had with the energy utility company was terminable at will and therefore damages are speculative. The Court rejected that argument and found that “the evidence was sufficient to support the award of future of damages,” and that the “jury did not need to speculate based on the testimony of the fact witnesses.” According to the Court, “there was specific evidence from fact witnesses that [the energy utility company customer’s] need for the [services] provided by the partnership did not change before the disassociation, had not changed since then, and was unlikely to change in the future.”
§ 3.7.4 Kansas
Hefner v. Deutscher, 2023 Kan. App. Unpub. LEXIS 136 (Mar. 24, 2023). This case involves a plaintiff professional medical practitioner who was terminated from his employment and ownership in a closely held corporation of medical professionals. His Employment and Redemption Agreement would have entitled him to a large payout for his stock ownership interest in the corporation at exit. However, the defendant corporation claimed that the plaintiff was threatening to breach the non-complete clause in his employment agreement which would mean that only a nominal payout was appropriate for the plaintiff’s stock. At trial, the plaintiff prevailed, and the trial court found that the corporation wrongly terminated the plaintiff in breach of his employment agreement, violated fiduciary duties and awarded plaintiff over $1 million in damages. The defendant appealed.
On appeal, the Court found that the trial court’s decision to be legally and factually sound and affirmed it. Furthermore, the Court noted that the trial court did not err in calculating damages. The Court noted that because the trial court found that the plaintiff did not violate the noncompete provisions this means that the plaintiff was terminated without cause. Therefore, under the Employment and Redemption Agreement, the purchase price of the stock is to be negotiated on the “existing practice value.” Because of the acrimonious situation between the parties, the Court concluded that “the task fell to the” trial court to quantify “existing practice value” and the trial court heard testimony from each party’s expert witness. Furthermore, the Court noted that the trial court weighed the evidence and gave greater weight to the expert’s appraisal which “relied on reasonable data provided by the Corporation and well-accepted appraisal principals.” In addition, the Court agreed with the trial court that in a wrongful termination, the plaintiff is additionally entitled to receive the regular salary and benefits he would have received in the meantime.
§ 3.7.5 Kentucky
Kenneth Raymond Schomp & Quality Logistics v. Holton, 2022 Ky. App. Unpub. LEXIS 584 (Oct. 14, 2022). This case involves a dispute regarding the value of the plaintiff’s ownership interest in a transportation logistics brokerage company which was organized as a limited liability company. The plaintiff was an employee with whom the company had entered into an incentive agreement which enabled him to purchase a 30.8 percent member’s interest. The founder owned the other member’s interest. Eventually, the founder and the plaintiff no longer got along, and the founder fired the plaintiff. A dispute arose regarding valuation of the plaintiff’s membership interest pursuant to the operating agreement. The trial court determined value and that decision was appealed.
The appellate court affirmed the trial court’s decision regarding value. The court noted that the trial court evaluated whether the appraisal by the company “comported with the obligations of good faith and fair dealing,” independent judgment and reasonable accuracy. At trial, issues were asserted about the accuracy of the company’s appraisal which the trial court reviewed. The appellate court found no error in the trial court’s analysis which concluded that while the appraisal “may not have been perfect, there is insufficient evidence to suggest that it was so lacking in good faith as to the make the financial data… unreliable” and that the valuation is reliable.
Also, the Court affirmed the award of pre-judgment interest because it is consistent with giving the plaintiff the benefit of his bargain as of 60 days after the company provided written notice of its intention to purchase the plaintiff’s member interest.
§ 3.7.6 Maryland
Furrer v. Siegel & Rouhana, LLC, 2022 Md. App. LEXIS 745; 2022 WL 9834101 (Oct. 17, 2022). This case involves a plaintiff attorney who was terminated and sued for the value of his unredeemed 26.5 percent member ownership interest in a five-member law practice which was organized as a limited liability company. The plaintiff member had his license to practice law indefinitely suspended and the parties could not agree regarding the value of his interest. The firm countersued for damages alleging that the withdrawing member mistreated clients.
On appeal, the Court affirmed the damages award but determined “that the trial court erred in determining the value of [plaintiff’s] unredeemed economic interest. Based on its erroneous interpretation of the applicable statutory framework under the LLC Act… the [trial] court awarded [plaintiff] his pro rata shares of the LLC’s profits and distributions for the one year after his withdrawal as a member” and still licensed to practice law. The Court noted that there was no operating agreement governing valuation, but each member had been receiving $10,000 per month in guaranteed payments, that quarterly profits were split equally without regard to who generated the revenues, and that plaintiff had been a member for over 20 years. Because of the absence of an operating agreement, the Court looked to the LLC Act to fill in the gaps. The Court determined that under the LLC Act, “withdrawing from the LLC changed [plaintiff[ from a member with an economic interest, i.e., a current right to share in the LLC’s profits, losses, and distributions, into an assignee of that economic interest, with the right to share only in the LLC’s assets, liabilities, profits, losses, and distributions, as they existed at the time of his withdrawal.” The Court concluded that the plaintiff was not “entitled, as a non-member of the LLC, to a perpetual ‘economic interest’ in the LLC,” and that “the unredeemed economic interest… as an assignee is limited to his 26% percent share of the fair value of assets, profits, losses and distributions to which he was entitled to” on the date of his withdrawal. Consequently, the Court vacated the trial court’s judgment and remanded for reconsideration of fair value.
§ 3.7.7 Michigan
In re Herremans, 653 B.R. 386 (Bankr. W.D. Mich. 2023). This case involves a dispute between two shareholders in a bankrupt restaurant business and the issue of the fair value of a 50 percent interest in the buyout of one shareholder by the other. The two owners had started the business 27 years earlier on a handshake and had no operating agreement. Five years of silence with the parties not speaking to each other, several years of litigation between the parties, and eight years in Chapter 12 bankruptcy proceedings ensued when the plaintiff filed a bankruptcy petition.
The Bankruptcy Court concluded that willful oppression on the rights of the plaintiff shareholder occurred and evaluated appropriate damages. The Court applied the Michigan shareholder oppression act as the remedy for oppressive conduct and ordered the oppressive shareholder to buyout the plaintiff’s interest at statutory “fair value.” Furthermore, the Court noted that “fair value” is not synonymous with “fair market value” and that “application of discounts in the valuation analysis is neither precluded nor required.” The Court found that the assessments by the parties of value “were mostly polar opposites.” The Court considered that the president of the franchisor testified that the brand is “a ‘lot’ less popular that it used to be, with only fifteen [restaurants] remaining in the country… and that the bulk of the value of the business is in the real estate itself,” and that the company’s financial statements showed that the company had positive but not very significant income.
Furthermore, the Court found issues with neither party choosing meaningful or consistent valuation dates. The Court determined that that most appropriate date at which to value the real estate is the date of the appraisal report itself, which was about eight months after the adversarial proceeding was filed. In addition, the Court determined that the values of the non-real estate assets listed in the corporate balance sheet should be adjusted to estimate the value as of the date of the real estate appraisal. The Court also considered that “the evidence at trial included very little credible evidence about … cash flow or earning capacity,” and found “that an asset approach is the most appropriate method for valuing.” The plaintiff argued that the appraisal’s value should be increased five percent for each year since the date of the report through the date of the Court’s decision; the Court rejected that argument. Also, the Court rejected the application of valuation discounts, stating that application of discounts would enable the oppressive 50 percent shareholder to force the plaintiff to sell at an unfair price to the benefit of the oppressor.
§ 3.7.8 Minnesota
Novak v. Miller, No. A22-1164, 2023 WL 2847207 (Minn. Ct. App. Apr. 10, 2023). Appellant-defendant was not entitled to have her interest in the LLC used to offset damages imposed by the district court’s judgment. When a member applies for and the district court orders dissolution of the company on the grounds that a member has acted in an illegal manner that is harmful to the applicant, the district court “may order a remedy other than dissolution.” Minn. Stat. § 322C.0701, subd. 2 (2022). This may be ordered “in any case where that remedy would be appropriate under all the facts and circumstances of the case.” Id. Here, the district court determined that defendant stole $494,590.94 and imposed a civil penalty of $100,000. The district court entered a judgment in favor of plaintiff against defendant for the entire amount stolen for the civil penalty. “Minnesota law permits the district court to order a remedy other than dissolution for the illegal acts of another member. Moreover, it is common sense that a party should not be able to offset the amount they converted by claiming an equal share of an LLC when it is dissolved.”
§ 3.7.9 New York
Matter of Galasso v. Cobleskill Stone Prods., Inc., 197 N.Y.S.3d 860 (2023). This case involved a petition by a decedent’s estate which owns 39 percent of the shares of a mining and construction company for judicial dissolution of the corporation and establishment of a judicial receivership. The corporate filed a written election to purchase the estate’s shares for its “fair value.” A dispute arose regarding the value which culminated in a valuation trial over two and half years later.
At the valuation trial, the Court heard testimony from expert witnesses, determined fair value and awarded pre-award interest. The Court found the income approach to value the company’s operating assets and the cost approach for valuing its non-operating assets appropriate, and applied certain adjustments for: reclamation costs on formerly-mined properties, costs to complete closure of a business line for which the decision to shut it down was previously made, excess inventory, and applied a discount for lack of marketability. The Court rejected adjustments for deferred income tax liabilities which it deemed “unlikely to ever come due,” excess cash as unwarranted given the large seasonal fluctuations and need for a working capital reserve.
Laurilliard v. McNamee Lochner, P.C., 2023 N.Y. Misc. LEXIS 3286 (Civ. Court of Richmond County, N.Y. Jun. 20, 2023) (Order). This case involves a dispute regarding the redemption buyout of a shareholder-employee in a law firm which shut down after merging into another law firm. Numerous partners refused to join the merged law firm and the firm demanded that they surrender their shares at book value, which was nominal, under the mandatory redemption provision of their employment agreements. These partners sued the firm and alleged breach of the employment agreements and breach of fiduciary duties.
The Court held that mandatory buy-sell agreements, “should not be undone simply upon an allegation of unfairness. This would destroy their very purpose, which is provide a certain formula by which to value stock in the future,” and that each plaintiff “accepted the offer to become a minority stockholder, but only for the period during which he remained an employee. The buy-back price formula was designed for the benefit of both parties precisely so that they could know their respective rights on certain dates and avoid costly and lengthy litigation on the ‘fair value’ issue.” Ultimately, the Court concluded that it would not “open the door to litigation on both the value of the stock and the date of termination and hinder the employer from fulfilling its contractual rights under the agreement.” Consequently, the Court granted defendants’ motion to dismiss the plaintiff’s complaint.
Rosenthal v. Erber, 2023 N.Y. Misc. LEXIS 4035 (New York Cnty., N.Y. Aug. 8, 2023) (Order). This case involves a dispute regarding the buyout of a passive 50 percent investor in a corporation which operated an optical business. The other 50 percent shareholder operated the business, and elected to purchase the passive investor’s interest at fair value.
The Court conducted a “fair value” hearing, during which it heard expert testimony. The court agreed with much of the plaintiff’s expert’s approach and “found him to be a credible witness.” The Court adjusted for some of the criticisms asserted by the defense side, such as overly optimistic growth rate and some non-comparable guideline companies and concluded, “The court finds and across the board 20 percent reduction to the valuations should fairly account for these aggressive assumptions.” The Court was unpersuaded by the defendant’s expert witness who “concluded based on the record evidence that the Company was worth $0.” “The notion that the Company is worthless is belied by the significant value [the defendant] derives from it.” Furthermore, the Court noted that the defendant “failed to provide all of the financial records to this expert.”
§ 3.7.10 North Carolina
Jayawardena v. Daka, 287 N.C. App. 393, 881 S.E.2d 759 (2022). This case involves a dispute among four shareholders who own shares in a physician group practice and members’ interests in two real estate limited liability companies, in which the entities have buy-sell agreements. The trial court entered partial summary judgment in favor of the defendants.
The Court of Appeals affirmed the trial court’s decision. The Court considered that the “[u]ndisputed record evidence demonstrates that the corporations’ regular accountants valued the business in good faith according to the parties’ agreement; that Plaintiff breached the operating agreements of two related LLCs by failing to identify an appraiser within the required time frame; and that the Defendants, who are minority shareholders like Plaintiff, did not act as a unified group sufficient to warrant treating them collectively as a controlling majority shareholder for purposes of fiduciary duties.”
Mauck v. Cherry Oil Co., Inc., 2023 NCBC LEXIS 144 (Supr. Court Lenoir County, N.C. Nov. 14, 2023). This case involves a dispute among family members regarding the management of their oil business, the remaining steps to buyout plaintiff’s shares in the corporation once the defendants voted to exercise the call provision in the shareholders’ agreement, and the company’s alleged refusal to permit the plaintiff to inspect certain company records.
The Court facilitated an agreement between the parties to have each party designate an appraiser, and for the two selected appraisers to select an independent third appraiser. Furthermore, the Court considered that the shareholder has statutory rights to inspect certain records until bought out and allowed certain inspection and copying of company records.
§ 3.7.11 Ohio
Miller v. Mission Essential [Grp.], LLC, 2023-Ohio-3077 (2023). This case involves an appeal from a judgement granting the fair value of a membership interest in a limited liability company, and whether the latest in a series of several operating agreements provided a sufficient basis to determine and pay the fair cash value of the dissenting member’s interest.
On appeal, the Court determined: 1) the trial court’s decision not to exclude the expert witness who relied on certain budgeted financial information was appropriate given that the trial court weighed the facts and circumstances and assessed the credibility of the witness and the relevance and reliability of the information at issue; 2) the trial court’s award of interest was appropriate because it has wide discretion to select a rate, but the trial court does not have discretion to not award interest; and 3) the trial court erred in applying discounts for minority position and lack of control, because that would result in a windfall to the buyer who would as a result become the 100 percent owner.
§ 3.7.12 Oregon
Ybarra v. Dominguez Fam. Enters., 322 Ore. App. 798 (2022). This case involves alleged shareholder deadlock and a dispute regarding the trial court’s decision that discounts for minority position and lack of marketability apply to plaintiff’s eight percent interest in a company that makes tacos. The trial court based its decision upon the reasoning that since it did not find that oppression had occurred then the “fair market value,” not “fair value,” standard of value applies.
On appeal, the Court concluded that the trial court erred, and vacated and remanded to the trial court to determine value under the “fair value” standard. However, the Court noted that it is not the case that such discounts never apply, “Rather, … the court must determine, based on all of the relevant facts and circumstances, whether to apply marketability and/or minority discounts in calculating the fair value of plaintiff’s shares under [the statute]. Because the trial court mistakenly understood that its determination of fair value required the absence of those discounts based on the absence of oppression alone, the court had no reason to consider whether these discounts were otherwise warranted in this case.”
