Opinion ID: 2570185
Heading Depth: 1
Heading Rank: 5

Heading: Application of McMinn II to This Case

Text: {24} For several reasons, the rationale of McMinn II simply does not apply in this case. First and foremost, the stock redemption transaction designed by Bennett for the purchase of BBV's shares in no way resembles the freeze-out merger in McMinn II. The Court of Appeals, relying on its previous opinion in McMinn I, incorrectly characterized the transaction in this case as a freeze-out transaction. See Peters Corp., 2007-NMCA-065, ¶ 33 (stating that Bennett's breach of fiduciary duty occurred in the kind of `freeze-out' transaction that the statutory appraisal remedy was designed for as the exclusive remedy). The term freeze-out, as it was used in McMinn II, refers to a corporate transaction[] in which the majority expels the minority stockholders from the company and requires them to accept cash, notes, or other property for their shares. Stephen J. Paine, Achieving the Proper Remedy for a Dissenting Shareholder in Today's Economy: Yuspeh v. Koch, 65 La. L.Rev. 911, 911 (Winter 2005). That was the only type of freeze-out transaction addressed by McMinn II, and that is not this case. {25} Unlike the merger in McMinn II, which was a true freeze-out of the non-controlling stockholder, the stock redemption transaction structured by Bennett and the NMBIC Board of Directors did not eliminate the Peters Group's interest in the company and force them to accept cash for their shares. The Peters Group was dissatisfied with the decision on the part of Bennett and the majority of the NMBIC shareholders not to buy BBV's shares directly, which would have allowed the Peters Group to participate in the purchase pro rata. The Peters Group reacted by leaving, electing to surrender their shareholder status and be cashed out. The Peters Group could just as well have retained their interests in the corporation, in which case they would have been in the same position as all the other shareholders, including Bennett, in terms of any benefits or losses resulting from the stock redemption transaction. In a word, the Peters Group was not frozen-out of anything. {26} Also in contrast to the freeze-out merger in McMinn II, NMBIC's stock redemption did not involve a conflict of interest that would create a presumption of self-dealing. When a corporate fiduciary, such as a director or controlling shareholder, has a direct or indirect interest in a transaction with the corporation, courts will view it with a high level of scrutiny to ensure that fairness. See Mayeux v. Winder, 2006-NMCA-028, ¶ 20, 139 N.M. 235, 131 P.3d 85 (quoting Cleary v. Cleary, 427 Mass. 286, 692 N.E.2d 955, 958 (1998), for general rule that one acting in a fiduciary capacity for another has the burden of proving that a transaction with himself was advantageous for the person for whom he was acting (quoted authority omitted)). {27} The Peters Group incorrectly asserts that the stock redemption transaction between NMBIC and BBV creates a facial presumption of self-dealing, in contrast to cases where the plaintiff participated in management and in the transactions in question, citing to Mayeux, 2006-NMCA-028, ¶¶ 19-20, for this proposition. The distinguishing point in Mayeux, however, was not the fact of the plaintiff's participation in management or the challenged transactions; rather, Mayeux pointed to the nature of a transaction as one where the fiduciary conducted a transaction with himself as the factor that creates a presumption of self-dealing. Id. The Peters Group has not demonstrated that Bennett or NMBIC stood on both sides of the transaction with BBV. Thus, there is no presumption of self-dealing in this case that would shift the burden to the defendants to show that the transaction did not constitute a breach of fiduciary duty. {28} The transaction in this case was conducted at arms length between two unrelated entities, NMBIC and BBV, and, as we discuss later in this Opinion, was governed by an unambiguous shareholders agreement. The district court found that Bennett's motivations in structuring the stock redemption transaction were legitimate and based on valid business concerns for NMBIC, to which Bennett also owed a fiduciary duty. As we noted in McMinn II, this is precisely the type of situation for which the appraisal remedy was designed. 2007-NMSC-040, ¶ 28 (Appraisal statutes were designed to protect dissenting shareholders by allowing them a `way out' of an investment involuntarily altered by a fundamental corporate change.). Thus, unlike the transaction in McMinn II, the exclusivity provision of the appraisal statute would apply to the stock redemption transaction in this case. {29} Of course, the exclusivity provision does contain an exception for unlawful or fraudulent conduct. See § 53-15-3(D) (stating that a shareholder who has dissenters' rights under the appraisal statute shall have no right at law or equity to attack the validity of the corporate action that gives rise to his right to obtain payment ... except when the corporate action is unlawful or fraudulent with regard to the complaining shareholder or to the corporation  (emphasis added)). In McMinn II, we held that, even if the exclusivity provision applied to the freeze-out transaction in that case, the conduct alleged by McMinn fell within the statutory exception, and McMinn had proved that he was entitled to both compensatory and punitive damages for the breach. McMinn II, 2007-NMSC-040, ¶ 36. However, McMinn II does not stand for the proposition that a shareholder pursuing a claim for breach of fiduciary duty alongside an appraisal action must always recover something beyond the fair value of his shares. {30} Indeed, as we noted in McMinn II, the proper remedy in a breach of fiduciary duty action involving the squeeze-out of a non-controlling shareholder in a close corporation is compensatory damages measured by the fair value of the former shareholder's shares. Id. ¶ 47 (citing Walta v. Gallegos Law Firm, P.C., 2002-NMCA-015, ¶¶ 28, 66, 131 N.M. 544, 40 P.3d 449) (emphasis added). Thus, McMinn II simply allows the shareholder to make a case that, under the exception to exclusivity, (1) the controlling shareholders breached a fiduciary duty, and (2) that breach rose to the level of unlawful or fraudulent, entitling the shareholder to a remedy beyond the fair value of his shares, such as punitive damages or disgorgement of profits. The Peters Group got to make their case; McMinn II does not mandate that they win it. We now evaluate the district court's decision not to award equitable relief or punitive damages under the applicable standard of review.