97-249

No. 97-249

IN THE SUPREME COURT OF THE STATE OF MONTANA

 

1998 MT 77

JENNIFER TULLY HANSEN and

FRANCES TULLY EISENMAN,

Plaintiffs and Appellants,

v.

75 RANCH COMPANY, a Montana

Corporation and PETER R. TULLY,

Defendants and Respondents.

APPEAL FROM: District Court of the Fourteenth Judicial District,

 In and for the County of Musselshell,

 The Honorable John C. McKeon, Judge presiding.

COUNSEL OF RECORD:

For Appellants:

Morris J. Braden (argued); Braden Law Firm, Billings,

Montana

For Respondents:

Richard F. Gallagher (argued); Church, Harris, Johnson &

Williams, Great Falls, Montana

Submitted: January 22, 1998

Decided: April 9, 1998

Filed:

 __________________________________________

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Clerk

Justice W. William Leaphart delivered the Opinion of the Court.

¶1 Jennifer Tully Hansen (Jennifer) and Frances Tully Eisenman (Frances)

(collectively Minority Shareholders) appeal from the decision of the

Fourteenth Judicial District Court, Musselshell County, determining that the

Minority Shareholders were equitably estopped from asserting dissenters'

rights pursuant to § 35-1-823, MCA, of the Montana Business Corporation

Act, that the 75 Ranch Company (Corporation) properly offered to purchase

the shares of the Minority Shareholders at a discounted rate, and that Peter

Tully (Peter or Majority Shareholder) did not breach his fiduciary duty or act

in an oppressive manner warranting relief to the Minority Shareholders

pursuant to §§ 35-9-501 to -504, MCA. We reverse and remand.

 Background

¶2 Robert R. Tully (Robert) and Joan B. Tully (Joan), the parents of the

parties to this action, established a family ranch near Roundup, Montana

around 1961. All five of the Tullys' children worked on the ranch throughout

their childhood. In 1980, the Tullys incorporated the 75 Ranch Company as

a close corporation hoping to avoid estate and inheritance tax liability. In

addition, the Corporation executed a "Stockholders' Agreement" in November

1982 providing a method of transferring the shares of a deceased shareholder

and restricting the transfer of shares by shareholders during their lifetime. 

Robert served as the President of the Corporation. Joan served as

Secretary/Treasurer. Robert and Joan together held 25,600 shares, a majority

of the stock. Each of the five Tully children held 2,880 shares. 

¶3 The record indicates that between 1980 and 1986, the Corporation held

informal meetings at family gatherings over the Christmas holidays. Minutes

of the meetings were kept and indicate that there was never more than one

shareholder absent from a shareholder meeting. After finishing college, Peter

became more active in the ranch and served as Vice President on the Board of

Directors. In 1986, Joan Tully died and Peter's wife, Rhonda, succeeded her

as Secretary/Treasurer of the Corporation. Beginning in 1987, it appears that

the Corporation adhered to corporate formalities even less stringently,

continuing to hold its meetings when the family gathered for the holidays and

keeping family members apprised of corporate business over the telephone. 

¶4 Robert passed away on June 10, 1989. Jennifer and Peter were

appointed as co-personal representatives of their father's estate. During

probate of Robert's estate, the shares were assigned a value of $12.26 per

share. Following the estate distribution, Peter owned 51 percent (20,400 of

40,000 shares) of the outstanding shares in the Corporation. Each of Peter's

siblings, including Jennifer and Frances, owned 12.25 percent (4,900 shares). 

Peter took over as President and Rhonda remained the Secretary/Treasurer.

¶5 Peter and Rhonda lived on the ranch and tended to the day-to-day

operations of the Corporation. They continued the informal corporate

management practice. In approximately December 1989, the shareholders

discussed the possibility of selling the ranch due to difficulties arising with

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coal company developments in the area. The record indicates that at this time,

Jennifer and her sister Pat Oertli told Peter that since he was the one who lived

on the ranch and dealt with the operations, he and Rhonda should decide

whether to sell the ranch. However, Jennifer specified that in the event Peter

chose to relocate the ranch, she desired to sell her shares in the Corporation

since she had no interest in maintaining ownership in a ranch other than the

family homestead. At that time, Peter requested that Jennifer wait about a year

after the family ranch was sold or exchanged before requesting a buy out of

her shares. 

¶6 Following the cancellation of certain grazing leases in 1992, Peter and

Rhonda started exploring options for disposition of the ranch. Peter retained

legal counsel to assist in an exchange of the Montana ranch for a New Mexico

ranch. In August 1992, Peter signed and executed an agreement to exchange

the properties. The agreement required that the transaction be structured as a

like-kind exchange under § 1031 of the Internal Revenue Code to avoid tax

consequences. The record reveals that the attorney retained by Peter was not

aware that other shareholders would be affected by the exchange and thus did

not advise Peter of the need to comply with the procedural notice requirements

of the Montana Business Corporation Act. 

¶7 On December 31, 1992, Peter, in his capacity as President of the

Corporation, executed a Contract and Exchange Agreement for the disposition

of substantially all of the Montana property. The exchange was closed and

completed on January 29, 1993. The selling price of the Montana property

was $875,000. The purchase price of the New Mexico property was

$850,000. Peter did not provide the Minority Shareholders with notice of the

proposed exchange, and did not submit copies of the exchange documents or

other relevant information for shareholder approval. Peter, however, asserted

that he spoke with several of the Minority Shareholders during the process of

exchanging the properties and that during those conversations none of the

Minority Shareholders voiced opposition to the proposed exchange.

¶8 In April 1993, Peter received a letter from Jennifer reiterating her desire

to sell her shares in the Corporation. In response, Peter contacted the

corporate accountant to determine the value of the shares in compliance with

the Stockholders' Agreement. In May 1993, Jennifer requested that Peter

negotiate the purchase with her attorney. On June 1, 1993, Peter made an

initial offer of $14.63 per share. This offer was based on a balance sheet dated

November 30, 1992; however, a copy of the balance sheet was not provided

with the initial offer.

¶9 On October 15, 1993, Jennifer rejected Peter's initial offer and

requested a copy of the balance sheet. Upon receiving the balance sheet and

reviewing it for the first time, Jennifer realized that the share valuation applied

a 30 percent minority discount. Therefore, by letter dated December 8, 1993,

Jennifer sent a counteroffer of $20.90, representing the value of a share

without the discount. In addition, Jennifer's December 8th letter informed

Peter that Frances desired a buy out of her shares at the $20.90 valuation. 

Peter testified that the December 8th letter was his first notice of dissenters'

rights. Not understanding the legal ramifications of dissenters' rights, Peter

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consulted an attorney and then responded with a compromise offer of $15.00

per share. The Minority Shareholders rejected Peter's compromise offer and

reasserted their offer of $20.90 per share. Unable to negotiate a resolution, the

Minority Shareholders filed suit on March 31, 1995.

¶10 At the District Court, the Minority Shareholders asserted the following

causes of action: violation of dissenting shareholders' rights, breach of

contract, breach of fiduciary duty, and right to an accounting and appraisal. 

Peter answered by asserting that the Minority Shareholders consented to and

ratified the exchange, and thus were estopped from asserting dissenters' rights. 

Following a bench trial, the District Court entered its Findings of Fact and

Conclusions of Law determining that the Minority Shareholders were

equitably estopped from asserting dissenters' rights, that the Corporation

properly offered to purchase the minority shares at a discounted rate and that

Peter did not breach fiduciary duties or act in an oppressive manner warranting

relief pursuant to §§ 35-9-501 to -504, MCA. The following issues are

presented on appeal:

¶11 1) Were the Minority Shareholders entitled to statutory notice of

dissenters' rights pursuant to 35-1-831, MCA?

¶12 2) Did the District Court err in concluding that the Minority

Shareholders were barred from asserting dissenters' rights pursuant to the

doctrines of waiver and equitable estoppel?

¶13 3) Did the District Court err in valuing the shares at "fair market value"

in accordance with the Stockholders' Agreement?

¶14 4) Did the District Court err in concluding that a minority discount

should be applied to the value of the shares?

¶15 5) Did the District Court err in adopting the valuation of the Majority

Shareholder's expert which included a tax discount?

¶16 6) Did the District Court err in concluding that Peter did not breach

fiduciary duties or act oppressively in his negotiations with the Minority

Shareholders?

¶17 7) Is either party entitled to recovery of attorney fees and costs?

We address issues 1 and 2, combine issues 3 and 4, address issue 5 and do not

reach issues 6 and 7.

 Discussion 

¶18 As a preliminary matter, Peter asserts that the Minority Shareholders'

§ 27-2-211(1), MCA. The Minority Shareholders argue that the three-year period in

§ 27-2-211(3), MCA, applies to this action. Peter argues that the Minority

Shareholders instigated this action seeking to assert rights, not recover a

penalty or forfeiture or enforce a liability as § 27-2-211(3), MCA,

contemplates. However, we determine that the provision Peter seeks to

invoke, § 27-2-211(1)(c), MCA, also contemplates an action upon a liability

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created by statute. The distinction between the two provisions is that

subsection (3) specifically applies to actions against directors or stockholders

of a corporation and allows a three-year period rather than the two-year period

Peter seeks to invoke. 

¶19 The District Court determined that subsection (3) applied to the current

action because §§ 35-11-823 to -839, MCA (provisions addressing dissenters'

rights) impose obligations on a corporation and its board of directors in the

event of the sale or exchange of all or substantially all of the corporate assets. 

In so concluding, the District Court applied a broad interpretation of "liability"

which includes an obligation created by law. We agree with the District

Court's broad interpretation of liability in analyzing § 27-2-211, MCA, and

determine that subsection (3), pertaining to directors and stockholders, applies

0to this case as the Minority Shareholders filed their complaint against Peter in

his capacity as the Majority Shareholder and President serving on the board of

directors. We affirm the District Court's finding that the sale/exchange

occurred on January 29, 1993 and that the Minority Shareholders were within

the applicable three-year statutory period of limitations when they filed suit on

March 31, 1995. We conclude that the Minority Shareholders' action is not

barred by the two-year statute of limitations imposed by § 27-2-211(1)(c),

MCA.

 Standard of Review

¶20 The parties to this action seek to invoke this Court's equitable

jurisdiction. Section 3-2-204(5), MCA, in combination with Rule 52(a),

M.R.Civ. P., control this Court's standard for reviewing equitable cases and

require that findings of fact be upheld unless they are clearly erroneous. 

McCann Ranch, Inc. v. Quigley-McCann (1996), 276 Mont. 205, 208, 915

P.2d 239, 241. However, we determine that the issues presented in this appeal

are legal in nature. Thus, we must review the District Court's conclusions of

law to determine whether the court's interpretation of the law is correct. 

Carbon County v. Union Reserve Coal Co., Inc. (1995), 271 Mont. 459, 469,

898 P.2d 680, 686.

 I

¶21 1) Were the Minority Shareholders entitled to statutory notice of

dissenters' rights pursuant to § 35-1-831, MCA?

¶22 Peter asserts that the Stockholders' Agreement should control the

Corporation's purchase of the Minority Shareholders' shares. In determining

the rights and duties of the parties, the District Court agreed with Peter and

applied the provisions of the Stockholders' Agreement. Section 35-9-301,

MCA, allows shareholders in a close corporation to enter agreements

determining their rights and obligations to each other and to the corporation. 

In close corporations, such as 75 Ranch, shareholders' agreements restricting

the manner in which shareholders may dispose of their shares are quite

common. The Stockholders' Agreement in this case indicates that the

document was designed to restrict the transfer of shares by shareholders during

their lifetime, to provide for a procedure for the purchase of the shares of a

deceased shareholder and "generally to agree regarding the disposition of stock

of the Corporation on various contingencies." The provisions of the

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Stockholders' Agreement, however, do not contemplate an exchange

transaction such as occurred in this case, or any other "fundamental change"

in the corporate form (e.g., merger or share exchange) that would give rise to

dissenters' rights. Therefore, we determine that the Stockholders' Agreement

does not control the resolution of this litigation. Rather, the provisions of the

Montana Business Corporation Act apply.

¶23 The Montana Business Corporation Act was derived from the Model

Business Corporation Act and its provisions virtually mirror those of the

Model Act. The comments to the Model Act explain that the remedy provided

by dissenters' rights statutes enables shareholders who object to extraordinary

corporate transactions to dissent from the corporate action and to require the

corporation to buy their shares at fair value. 3 Model Bus. Corp. Act

Annotated § 13.01 at 13-8 (3d ed. 1995 Supp). The United States Supreme

Court explained in Voeller v. Neilston Warehouse Co. (1941), 311 U.S. 531,

535 n.6, 61 S.Ct. 376, 377 n.6, 85 L.Ed. 322, 326 n.6, that

 [a]t common law, unanimous shareholder consent was a

 prerequisite to fundamental changes in the corporation. This

 made it possible for an arbitrary minority to establish a nuisance

 value for its shares by refusal to co-operate. To meet the

 situation, legislatures authorized the making of changes by

 majority vote. This, however, opened the door to victimization

 of the minority. To solve the dilemma, statutes permitting a

 dissenting minority to recover the appraised value of its shares

 were widely adopted.

More recent versions of this remedy allow a dissenting shareholder to "demand

that the corporation buy back his shares at fair value if the corporation takes

an action which fundamentally alters the character of the shareholder's

investment." Waters v. Double L, Inc. (Idaho App. 1987), 755 P.2d 1294,

1297 (citation omitted). 

¶24 The Montana Business Corporation Act, at § 35-1-823, MCA,

addresses a corporation's selling, leasing, exchanging or otherwise disposing

of all or substantially all of its property otherwise than in the regular course of

business. However, for such a transaction to be authorized, the statute

requires that the board of directors shall first recommend the proposed

transaction to the shareholders, and the shareholders entitled to vote shall

approve the transaction. The corporation must notify the shareholders of the

proposed shareholder meeting and that the purpose of the meeting is to

consider the sale, lease, exchange or disposition of the property. The notice

should be accompanied by a description of the transaction. If a proposed

corporate action creating dissenters' rights is submitted to a vote at a

shareholders' meeting, the notice must also state that the shareholders are

entitled to assert dissenters' rights. Section 35-1-829, MCA. Furthermore, 

35-1-827, MCA, provides that upon the consummation of a sale or exchange

of all or substantially all of the property of the corporation other than in the

usual course of business, a shareholder is entitled to dissent from the corporate

action and obtain payment of the fair value of the shareholder's shares. 

¶25 Section 35-1-829(2) applies when a corporation takes an action creating

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dissenters' rights without a vote of the shareholders. In such a case, the

corporation must give written notification to all shareholders entitled to assert

dissenters' rights that the action was taken and must send them the dissenters'

notice no later than 10 days after the corporate action was taken. Subsection

(2) is an acknowledgment by the legislature that some corporate actions

resulting in a fundamental change need not be presented, or simply are not

presented, for a vote. 3 Model Bus. Corp. Act 13.20 Official Comment at

13-44, 45. The consequence of such fundamental change, however, is the

same as an action where a vote is taken in that shareholders may, after the fact,

assert dissenters' rights as a remedy. 

¶26 The parties concede that Peter, acting as President of the Corporation,

exchanged substantially all of the property of the Corporation other than in the

ordinary course of business. This transaction gave rise to dissenters' rights

under the Montana Business Corporation Act. Peter, however, did not, in

compliance with § 35-1-823, MCA, notify each shareholder of the proposed

exchange or hold a shareholders' meeting to allow the shareholders to vote on

the proposed exchange. Most importantly, Peter did not, in compliance with

§§ 35-1-829 and -831, MCA, give the shareholders notice of dissenters' rights

before or within 10 days after the exchange. 

¶27 In his defense, Peter asserts that in the course of negotiating the New

Mexico transaction he discussed the exchange with the Minority Shareholders

over the telephone. Peter asserts that the Minority Shareholders did not voice

opposition to the exchange. In addition, Peter testified that he believed that

since corporate matters had always been conducted informally, the usual

manner of conducting business would be sufficient for the exchange. Peter

asserts that even though the exchange was handled by the Corporation's

retained counsel, it was not until he received the December 8, 1993 letter

(nearly one year after the exchange) from the Minority Shareholders' counsel

that he was informed of dissenters' rights. Finally, Peter asserts that by

"acquiescing or consenting to, and participating in the informal operation of

75 Ranch for many years, the minority shareholders waived their rights to

strict enforcement of corporate statutory rights and requirements and it would

be inequitable to allow their strict assertion now."

¶28 The District Court agreed with Peter's acquiescence theory and

determined that the Minority Shareholders' failure to object during the

exchange transaction amounted to consent which equitably estopped them

from asserting dissenters' rights. The District Court held that "[a] shareholder

is not entitled to assert dissenting rights when he/she is in favor of the

transaction" (citing § 35-1-830(1)(b), MCA). Jennifer asserts, however, that

she informed Peter that in the event the family homestead was exchanged for

another ranch, she was not interested in remaining a shareholder. In addition,

the Minority Shareholders argue that the proposed exchange was never

presented for their vote at a shareholders' meeting; therefore, § 35-1-830(1)(b),

MCA, which bars dissenters' rights in the event a shareholder votes in favor

of the proposed corporate action, does not apply in this instance. Moreover,

because the Minority Shareholders were never given notice of their right to

dissent, they could not possibly have knowingly waived such rights.

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¶29 Section 35-1-830(1)(b), MCA, cited by the District Court as authority

barring the Minority Shareholders' right to notice of dissenters' rights, states

that "[i]f proposed corporate action creating dissenters' rights . . . is submitted

to a vote at a shareholders' meeting, a shareholder who wishes to assert

dissenters' rights . . . may not vote his shares in favor of the proposed action." 

We determine, however, that if the action is never presented for a vote, as in

this case, § 35-1-830(1)(b) cannot be invoked to later bar minority

shareholders from asserting their rights. The Minority Shareholders were not

given an opportunity to vote regarding the exchange nor were they notified of

their right to dissent from the Corporate exchange; therefore, we determine

that the Minority Shareholders could not knowingly waive their right to assert

dissenters' rights in the manner contemplated by § 35-1-830, MCA. The

District Court's conclusion that § 35-1-830(1)(b), MCA, barred the Minority

Shareholders from asserting dissenters' rights, in light of their failure to

expressly object to Peter's actions, is incorrect as a matter of law. We

determine that the Minority Shareholders were entitled to statutory notice of

dissenters' rights pursuant to § 35-1-831, MCA.

 II

¶30 2) Did the District Court err in concluding that the Minority

Shareholders were barred from asserting dissenters' rights pursuant to the

doctrines of waiver and equitable estoppel?

¶31 The District Court found that "[b]ecause of the disclosures and other

findings . . . the objection of Jennifer and Frances to the exchange, as asserted

in their exercise of dissenters' rights, is a fact which was either known by them

or which can necessarily be imputed to them to have existed prior to the

exchange." However, waiver is the voluntary, intentional relinquishment of

a known right, which will be declared only when the party clearly manifests

such an intention. McGregor v. Mommer (1986), 220 Mont. 98, 110, 714 P.2d

536, 543. The presence of voluntariness and the requisite intent are

necessarily questions of fact. McGregor, 714 P.2d at 544. 

¶32 The District Court found that the Minority Shareholders knew of their

objection to the exchange and thus their failure to expressly object resulted in

waiver. We disagree. Before the exchange took place, Jennifer stated that she

did not want an interest in a ranch other than the family homestead. More

importantly, we determined above that the Minority Shareholders were entitled

to notice of the sale and of their right to dissent under the Montana Business

Corporation Act. In the absence of a notice of sale and right to dissent, it

cannot be said that the Minority Shareholders knowingly and voluntarily

waived their rights. Finally, the Minority Shareholders did not clearly

manifest an intent to waive their right to dissent. The District Court erred in

concluding that, as a result of their silence, the Minority Shareholders waived

their right to dissent.

¶33 In order to assert equitable estoppel as a defense, Peter must establish

the following essential elements:

 (1) there must be conduct, acts, language, or silence amounting

 to a representation or concealment of material facts; (2) these

 facts must be known to the party estopped at the time of his

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 conduct, or at least the circumstances must be such that

 knowledge of them is necessarily imputed to him; (3) the truth

 concerning these facts must be unknown to the other party

 claiming the benefit of the estoppel at the time it was acted upon

 by him; (4) the conduct must be done with the intention, or at

 least with the expectation, that it will be acted upon by the other

 party, or under the circumstances that it is both natural and

 probable that it will be so acted upon; (5) the conduct must be

 relied upon by the other party, and thus relying, he must be led

 to act upon it, and (6) he must in fact act upon it in such manner

 as to change his position for the worse.

Dagel v. City of Great Falls (1991), 250 Mont. 224, 234-35, 819 P.2d 186,

192-93. We have held that 26-1-601, MCA, must be considered when

analyzing equitable estoppel. Section 26-1-601 provides a list of conclusive

presumptions and includes: 

 (1) the truth of a declaration, act, or omission of a party, as

 against that party in any litigation arising out of such

 declaration, act, or omission, whenever he has, by such

 declaration, act, or omission, intentionally led another to believe

 a particular thing true and to act upon such belief[.]

We further explained in Dagel that " '[e]stoppel is a principle of equity . . .

equity will grant relief sought when in view of all the circumstances to deny

it would permit one of the parties to suffer a gross wrong at the hands of the

other party who brought about the condition . . . . Estoppel is not favored and

will only be sustained upon clear and convincing evidence . . . .' " Dagel, 819

P.2d at 193 (quoting Kenneth D. Collins Agency v. Hagerott (1984), 211

Mont. 303, 310, 684 P.2d 487, 490). 

¶34 The District Court concluded that the conduct, acts, language and

silence of Jennifer and Frances amounted to representations of approval of the

exchange and concealment of objection. These representations of approval

rather than objection are a material fact. In completing the exchange, 75

Ranch and Peter relied upon the conduct, acts, language and silence of

Jennifer and Frances. Because of this reliance, their position has changed for

the worse. In short, the District Court concluded that the Minority

Shareholders, by failing to expressly object to the exchange by the

Corporation, waived their right to dissent and should be estopped from

asserting dissenters' rights. 

¶35 However, we have held that "estoppel 'has no application where the

omissions of the party claiming estoppel brought about the problem.' " 

McGregor, 714 P.2d at 544 (quoting Carroccia v. Todd (1980), 189 Mont.

172, 177-78, 615 P.2d 225, 228; First Sec. Bank of Bozeman v. Goddard

(1979), 181 Mont. 407, 593 P.2d 1040). We determine that Peter's failure to

provide the Minority Shareholders with notice of the proposed exchange and

an opportunity to dissent prevents Peter from claiming estoppel as it was his

omission that gave rise to Jennifer and Frances' silence. We hold that the

District Court erred in concluding that the Minority Shareholders were barred

from asserting dissenters' rights pursuant to the doctrines of waiver and

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equitable estoppel. 

 III

¶36 3) Did the District Court err in valuing the shares at "fair market value"

in accordance with the Stockholders' Agreement?

¶37 4) Did the District Court err in concluding that a minority discount

should be applied to the value of the shares?

¶38 The District Court, concluding that the rights, status, and legal

relationship of the parties is determined by contract, namely the Stockholders'

Agreement, held that the express written terms of the Stockholders' Agreement

set the purchase price for the shares at "fair market value." The court further

determined that, based on McCann Ranch and In re Marriage of Jorgenson

(1979), 180 Mont. 294, 590 P.2d 606, the application of a minority discount

is allowed when determining "fair market value" under a Stockholders'

Agreement. However, in McCann Ranch, the shareholder did not assert

dissenters' rights or institute proceedings to challenge McCann Ranch's failure

to notify her of dissenters' rights. The action was instituted by the corporation

solely for the purpose of establishing the value of her stock. McCann Ranch,

915 P.2d at 242. In addition, the district court in McCann Ranch found that

a minority discount was appropriate based on the methodology recommended

by the shareholder's expert. McCann Ranch, 915 P.2d at 243. Furthermore,

Marriage of Jorgenson is distinguishable in that this Court was presented with

the issue of fairness of a property distribution in a dissolution of marriage. 

The minority discount in Marriage of Jorgenson was applied to the market

value of the shares in accordance with a shareholders' agreement, not as a

result of a transaction giving rise to dissenters' rights. Marriage of Jorgenson,

590 P.2d at 610. 

¶39 The Minority Shareholders in this case requested relief pursuant to the

dissenters' rights provisions of the Montana Business Corporation Act. 

Section 35-1-827(1)(c), MCA, states that "[a] shareholder is entitled to dissent

from and obtain payment of the fair value of the shareholder's shares in the

event of . . . consummation of a sale or exchange of all or substantially all of

the property of the corporation other than in the regular course of business .

. . ." Section 35-1-826(4), MCA, defines "fair value" with respect to

dissenters' shares as "the value of the shares immediately before the

effectuation of the corporate action to which the dissenter objects . . . ." 

Because we have determined that the Montana Business Corporation Act

controls, we further conclude that the Minority Shareholders are entitled to

"fair value" in accordance with the statutes, rather than "fair market value" as

provided in the Stockholders' Agreement.

¶40 In McCann Ranch, we held that nothing in § 35-1-826(4), MCA,

prohibits consideration of a minority shareholder's lack of control and lack of

marketability for minority shares when establishing "fair value." McCann

Ranch, 915 P.2d at 242-43. We further reasoned that "[a] discount for a

minority interest is appropriate when the minority shareholder has no ability

to control salaries, dividends, profit distributions and day-to-day corporate

operations." McCann Ranch, 915 P.2d at 243 (citations omitted). However,

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the majority of courts addressing the issue of minority discounts has held that

discounts should not be taken when determining fair value of minority shares

sold to another shareholder or to the corporation. See John J. Oitzinger, Fair

Price and Fair Play Under the Montana Business Corporation Act, 58 Mont.

L. Rev. 407, 420 n.82 (1997). These courts clarify that discounts at the

shareholder level are inherently unfair to the minority shareholder who did not

pick the timing of the transaction and is not in the position of a willing seller.

Thus, these courts hold that a dissenting shareholder's position should be the

equivalent of what it would have been had the fundamental change not

occurred. Moreover, they reason that valuing the shares at less than their

proportionate share of the corporation's fair value produces a transfer of wealth

from the minority shareholder to the shareholders in control. Oitzinger, 58

Mont. L. Rev. 420-21 (citing In re McLoon Oil Co. (Me. 1989), 565 A.2d 997,

1005). We find the policies expressed by these courts compelling and therefore

overrule our decision in McCann Ranch to the extent that it holds that a

minority discount is appropriate when calculating "fair value" for the sale of

a minority shareholder's shares in a closely-held corporation to a majority

shareholder or to the corporation.

¶41 Applying a discount is inappropriate when the shareholder is selling her

shares to a majority shareholder or to the corporation. The sale differs from

a sale to a third party and, thus, different interests must be recognized. When

selling to a third party, the value of the shares is either the same as or less than

it was in the hands of the transferor because the third party gains no right to

control or manage the corporation. However, a sale to a majority shareholder

or to the corporation simply consolidates or increases the interests of those

already in control. Therefore, requiring the application of a minority discount

when selling to an "insider" would result in a windfall to the transferee. This

is particularly true since the transferring shareholder would expect that the

shares would have at least the same value in her hands as in the hands of the

transferee. See Steven C. Bahls, Resolving Shareholder Dissention: Selection

of the Appropriate Equitable Remedy, J. Corp. L. 285, 302 (Winter 1990). In

short, "a minority discount recognizes that controlling shares are worth more

in the market than are noncontrolling shares. . . ." Shear v. Gabovich (Mass.

App. Ct. 1997), 685 N.E.2d 1168, 1187 (citation omitted). Since there is no

"market" involved in an inside transfer of shares, the minority discount should

not be applied.

¶42 Moreover, we recognize that the dissenters' rights provisions of the

Model Business Corporation Act, as adopted by the Montana legislature, were

fashioned as a legislative remedy for minority shareholders who find their

interests threatened by significant corporate changes. See 3 Model Bus. Corp.

Act § 13.01 at 13-8 (discussing the historical background of dissenters' rights). 

The dissenters' rights provisions protect the minority shareholders by allowing

them to obtain payment of fair value for their shares. Based on this policy,

many courts realize that applying discounts when valuing the shares of a

dissenting shareholder destroys the legislative intent to protect the minority

shareholder's right to dissent. MT Properties, Inc. v. CMC Real Estate Corp.

(Minn. App. 1992), 481 N.W.2d 383, 387 (noting that courts in Delaware,

Rhode Island, Iowa, Missouri, Maine, California, Colorado and Oregon are

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among those rejecting minority discounts for the reason that discounts defeat

legislation enacted to protect the minority's right to dissent); see also Charland

v. Country View Golf Club, Inc. (R.I. 1991), 588 A.2d 609; Christopher

Vaeth, Annotation, Propriety of Applying Minority Discount to Value of

Shares Purchased by Corporation or its Shareholders from Minority

Shareholders, 13 A.L.R. 5th 840 (1993). 

¶43 We conclude that the Minority Shareholders are entitled to fair value

pursuant to § 35-1-827, MCA. Fair value means the value of the shares

immediately before the effectuation of the corporate action to which the

dissenter objects. Section 35-1-826(4), MCA. We further conclude that

application of a minority discount is inappropriate when minority shareholders

in a close corporation sell their shares to the corporation or majority

shareholders in a situation controlled by the dissenters' rights statute. We hold

that the District Court erred in concluding that a discount applied to the

minority shares. We remand to the District Court for a valuation of the shares'

fair value without the application of a minority discount.

¶44 Further, since we hold that the Montana Business Corporation Act

controls, we direct the District Court to reconsider the Minority Shareholders'

request for appointment of an appraiser pursuant to § 35-1-838, MCA. That

provision allows the District Court to appoint one or more appraisers to

receive evidence and recommend a decision on the question of fair value. 

Section 35-1-838(4), MCA. 

 IV

¶45 5) Did the District Court err in adopting the valuation of the Majority

Shareholder's expert which included a tax discount?

¶46 As courts have noted, the determination of "fair value" is an "inexact

science" and its application has generated a large, disparate body of case law. 

See Kaiser v. Kaiser (N.D. 1996), 555 N.W.2d 585, 587; Robblee v. Robblee

(Wash. 1992), 841 P.2d 1289. We note that most courts, in valuing the shares

of a dissenting shareholder based on fair value, recognize three approaches:

asset value, market value and earnings value. Asset value concentrates on the

real worth of the corporate assets and can be determined by valuing the

corporation upon a liquidation or by valuing the corporation as a going

concern. Market value refers to valuation of the shares on the basis of the

price for which a willing buyer would pay a willing seller. Earnings value

relates to the earning capacity of the corporation and is usually arrived at by

averaging earnings over a number of years. Brown v. Hedahl's-Q B & R, Inc.

(N.D. 1971), 185 N.W.2d 249; see generally Ferdinand S. Tinio, Annotation,

Valuation of Stock of Dissenting Stockholders in Case of Consolidation or

Merger of Corporation, Sale of its Assets, or the Like, 48 A.L.R. 3d 430 (1973

& Supp. 1997). On remand, we note that courts have discretion to consider a

number of factors including, but not limited to, the methods of valuation

explained above. 

¶47 The District Court was presented with two experts regarding the value

of the Minority Shareholders' shares. The Minority Shareholders' expert,

Watts, appears to have advocated the earnings value method of valuation. On

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the other hand, Gilbert, expert for Peter and the Corporation, advocated the

liquidation method of assessing asset value. The District Court determined that

the evidence most credible in establishing "fair market value" was the

testimony of Gilbert. On appeal, Peter asserts that "[a] sale, as contemplated

under the asset approach, gives rise to a tax liability. . . ." However, courts

have noted that unless the corporation is undergoing an actual liquidation, the

liquidation method is not an appropriate method of valuing shares of a

dissenting shareholder. See Cede & Co. v. Technicolor, Inc. (Del. 1996), 684

A.2d 289 (failure to value the company as a going concern may result in an

understatement of fair value); Friedman v. Beway Realty Corp. (N.Y. 1995),

661 N.E.2d 972 (the fair value of a dissenter's shares is to be determined on

their worth in a going concern, not in liquidation); Rapid-American Corp. v.

Harris (Del. 1992), 603 A.2d 796 (it is axiomatic that in a statutory appraisal

proceeding, the dissenting shareholders are entitled to receive fair value

representing their proportionate interest in a going concern); Elk Yarn Mills

v. 514 Shares of Common Stock (Tenn. 1987), 742 S.W.2d 638 (holding that

the corporation is a going concern and the dissenting shareholders are entitled

to a valuation of their shares on that basis and noting that the overwhelming

weight of authority approves the valuation of the assets of the corporation as

a going concern). Specifically, the Supreme Court of Delaware has explained

that "the dissenter in an appraisal action is entitled to receive a proportionate

share of fair value in the going concern on the date of the [action giving rise

to dissenters' rights], rather than value that is determined on a liquidated

basis." Cede & Co., 684 A.2d at 298 (citations omitted). 

¶48 On remand, the District Court must determine "fair value" as opposed

to "fair market value." In deciding whether to assess costs of the exchange or

apply a tax discount in the "fair value" analysis, the court must bear in mind

that "fair value," as explained above, means the value of the shares

immediately before the effectuation of the corporate action to which the

dissenter objects. Thus, if costs are incurred after effectuation of the

exchange, those costs should not be assessed against the dissenting

shareholders. Likewise, as to applying a tax discount, in cases arising under

appraisal statutes, courts have recognized that "ordinarily when dissenting

stock is accorded net asset value, that value is to be determined by considering

the corporation as a going concern and not as if it is undergoing liquidation." 

Tinio, 48 A.L.R. 3d at 465.

¶49 Because we determine that the Minority Shareholders are entitled to

"fair value" pursuant to the dissenters' rights statute, we do not reach the issue

of whether the Majority Shareholder acted in an oppressive manner that

breached fiduciary duties which could entitle the Minority Shareholders to fair

value pursuant to §§ 35-9-501 and -503, MCA. In addition, we leave to the

District Court the determination of whether to assess court costs and attorney

fees pursuant to § 35-1-839, MCA. We reverse and remand to the District

Court for a determination of the "fair value" of the Minority Shareholders'

shares and other relevant matters in accordance with this opinion.

 /S/ W. WILLIAM LEAPHART

We concur:

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/S/ J. A. TURNAGE

/S/ JAMES C. NELSON

/S/ KARLA M. GRAY

/S/ WILLIAM E. HUNT, SR.

/S/ JIM REGNIER 

/S/ TERRY N. TRIEWEILER

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