Opinion ID: 1117163
Heading Depth: 1
Heading Rank: 9

Heading: Kansas Corporate Law Cases

Text: Before addressing the plaintiffs' specific arguments under K.S.A. 56a-404, we first address the parties' arguments involving fiduciary duties and burdens of proof set forth in Kansas corporate cases. First, the defendants' argue that Via Christi had a right to amend the limited partnership agreement and proceed with the merger, and that under Kansas common law, the freeze-out merger, in and of itself, did not constitute a breach of a fiduciary duty. As no Kansas cases have considered whether such a freeze-out merger between a limited partnership and a limited liability company involves a breach of a fiduciary duty, the defendants point to Kansas cases which have approved similar freeze-out mergers in a corporate context. In Arnaud v. Stockgrowers State Bank, 268 Kan. 163, 164, 992 P.2d 216 (1999), this court considered the following certified question: `Is it proper for a corporation to determine the fair value of a fractional share pursuant to K.S.A. § 17-6405 by applying minority and marketability discounts when the fractional share resulted from a reverse stock split intended to eliminate the minority shareholder's interest in the corporation?' In resolving the issue, we approved the following procedure: This court has previously approved the procedure that the defendants have used to force the buy out of the plaintiffs' minority share holdings. See Achey v. Linn County Bank, 261 Kan. 669, 931 P.2d 16 (1997) (allowing the corporation to initiate a reverse stock split and force the buy-out of the minority shareholders' stock in order to prevent any fractional share holdings). We did not, however, discuss whether minority or marketability discounts should be applied in determining the `fair value' that was to be paid to the minority shareholders. [Citation omitted.] 268 Kan. at 165. In In re Hesston Corp., 254 Kan. 941, 870 P.2d 17 (1994), following a cash-out merger, the dissenting shareholders argued the corporate board of directors breached its fiduciary duty to them by failing to adequately and carefully consider all factors relevant to an informed decision whether to cash them out. Noting the established rule that a director of a corporation owes a high fiduciary duty to the other stockholders of the corporation, Hesston stated in relevant part: `In the context of acquisitions, divestitures, and other reorganizations, both management and majority shareholders owe to the corporation and to the minority shareholders thereof a duty to exercise good faith, care, and diligence to make the property of the corporation produce the largest possible amount, to protect the interest of the holders of minority stock, and to secure and pay over to them their just proportion of the income and of the proceeds of corporate property. These duties have particular emphasis in the context of a cash-out or freeze-out merger, which is a merger effected for no valid business purpose and resulting in the elimination of one or more minority shareholders. . . . `In cases of corporate merger, there is no violation of fiduciary duty owed by dominant stockholders to public stockholders if there has been neither fraud, selfdealing nor price manipulation, and alternatives afforded to public shareholders are a fair price fairly determined or a statutory right to appraisal.' 254 Kan. at 982-83 (quoting 19 Am. Jur. 2d, Corporations § 2566). Under the facts of Hesston, we affirmed the district court's conclusion that no breach of fiduciary duty had occurred despite the corporate board of directors' failure to obtain an independent fairness evaluation regarding the merger agreement, in part because it was offset by the statutory right of appraisal which the minority shareholder's had already pursued. See 254 Kan. at 985, 990-92. Additionally relevant to this case, the district court had noted: `It is not necessary for a corporation to show a valid corporate purpose for eliminating minority stockholders. The business purpose requirement was eliminated in Delaware in Weinberger v. UOP, 457 A.2d 701, 711 (Del. 1983).' 254 Kan. at 984. We note that these cases do not establish that a freeze-out merger involving corporations is never a breach of a fiduciary duty. While Arnaud and Achey approved the freeze-out procedure in the corporate context, they did not consider whether the parties' actions constituted a breach of a fiduciary duty. Hesston does suggest that some freeze-out mergers may not breach fiduciary duties when there is no evidence of fraud, self-dealing or price manipulation, and when a fair price is fairly determined or a statutory right to appraisal is available. However, while self-dealing is clearly present in this case, it is important to recognize the distinction under the KUPA statute providing that pursuing one's own self-interest is not per se a breach of a fiduciary duty. See K.S.A. 56a-404(e) (A partner does not violate a duty or obligation under this act or under the partnership agreement merely because the partner's conduct furthers the partner's own interest.). This self-dealing distinction is also important in light of the numerous corporate cases relied upon by the plaintiffs in this case. A majority of the cases cited establish that Kansas law holds fiduciaries to a strict standard. Thus, plaintiffs argue that based upon this strict standard, the burden of proof in the circumstances of the case we now consider should have been shifted to the defendants. Before considering these corporate cases, we first note that reliance upon corporate case law in an attempt to resolve questions arising under a merger between a limited partnership and a limited liability company is not without problems. While there are similarities, before reliance may be had, accommodation must be made for important differences. One important difference noted above involves K.S.A. 56a-404(e), authorizing a partner to pursue his or her own interest. The RUPA Official Comment to § 404 notes that [a] partner as such is not a trustee and is not held to the same standards as a trustee. RUPA § 404, cmt. 5, 6 (Pt. 1) U.L.A. at 146. The Comment further notes [t]hat admonition has particular application to the duty of loyalty and the obligation of good faith and fair dealing. It underscores the partner's rights as an owner and principal in the enterprise, which must always be balanced against his [or her] duties and obligations as an agent and fiduciary. RUPA § 404, cmt. 5, 6 (Pt. 1) U.L.A. at 146. In the corporate field, a member of the board of directors is a true trustee subjecting such director in his or her dealing with minority shareholders to the closest scrutiny. In Hotchkiss v. Fischer, 136 Kan. 530, 16 P.2d 531 (1932), this court found that when a director purchased corporate shares from a shareholder, such transactions must be subjected to the closest scrutiny, and unless conducted with the utmost fairness the wronged shareholder may invoke proper remedy. 136 Kan. at 538. However, it is important to note in this case, the general partner, Via Christi did not purchase the plaintiffs' limited partnership interests. It did, however, have the partnership valued through an appraisal and then paid all the partners including itself the appraised value of their respective interests in the partnership. Thus, each limited partner and the general partner were paid the same amount for each unit of partnership owned at the time of merger. In Sampson v. Hunt, 222 Kan. 268, 564 P.2d 489 (1977), we recognized that a director of a corporation owes a high fiduciary duty to its stockholders and that `[w]hen two parties occupy to each other a confidential or fiduciary relation, and a sale is made by one to the other, equity raises a presumption against the validity of the transaction. To sustain it the buyer must show affirmatively that the transaction was conducted in good faith, without pressure or influence on his part, and with express knowledge of the circumstances and entire freedom of action on the part of the seller.' 222 Kan. at 271 (quoting Stewart v. Harris, 69 Kan. 498, Syl. ¶ 2, 77 Pac. 277 ([1904]). The court concluded that where knowledge of facts affecting the value or price of stock comes to an officer or director of a corporation by virtue of his office or position, he is under a fiduciary duty to disclose such facts to other stockholders before dealing in company stock with them. 222 Kan. at 272. Again, it must be noted that Via Christi did not purchase the interests of the limited partner plaintiffs. Plaintiffs and defendant Via Christi received the same amount for each unit of partnership owned by them. Thus, the partnership was dissolved through merger into the limited liability company. In Newton v. Hornblower, Inc., 224 Kan. 506, 582 P.2d 1136 (1978), the plaintiff corporate director claimed the defendant corporation, limited partnership, and corporate directors breached their fiduciary duties to the corporation, the limited partnership, and the plaintiff by making unauthorized expenditures of corporate and partnership funds to the benefit of the individual defendants and to the detriment of the corporation, the partnership, and the plaintiff. In setting forth the burden of proof, we stated: Any unfair transaction undertaken by one in a fiduciary relationship may result in liability for unjust enrichment of the fiduciary. Where the fairness of a fiduciary transaction is challenged, the burden of proof is upon the fiduciary to prove by clear and satisfactory evidence that such transaction was fair and done in good faith. 224 Kan. 506, Syl. ¶ 9. In the case we now consider, there is no allegation that unauthorized expenditures were made from the partnership to diminish the value paid to the minority interests. In Richards v. Bryan, 19 Kan. App. 2d 950, 879 P.2d 638 (1994), the minority shareholder in a closely held corporation brought suit against the majority shareholders claiming in part that they breached their fiduciary duty to him by making it appear that the corporation was unprofitable to avoid payment of additional compensation. The court clarified the burden of proof set forth in Newton by pointing to Cookies Food Products, Inc. v. Lakes Warehouse, 430 N.W.2d 447 (Iowa 1988), where the plaintiff was required to make out a prima facie case of self-dealing before the burden shifted to the defendant to show the actions were done in good faith. Under the facts of Richards, the Court of Appeals found the district court erred in granting summary judgment in favor of the majority shareholders once the plaintiff had established a prima facie showing of breach of duty, effectively requiring the minority shareholder to prove his entire case at the summary judgment stage rather than shifting the burden of proof to the majority shareholders. 19 Kan. App. 2d at 966-67. We recognize that the K.S.A. 56a-404(e) provisions of RUPA do not authorize a partner to pursue his or her own interests without regard to the partnership and other partners. Professor Edwin W. Hecker, Jr., in discussing 56a-404(e), noted: This provision does not state that a partner may always further his or her self-interest with impunity. That would directly contradict, and in fact repeal, the duty of loyalty. Rather, it simply states that `merely' because certain conduct furthers the partner's own interest is insufficient, in and of itself, to establish a violation of the duty of loyalty. The Official Comments explain that a partner is not a technical trustee and is not held to the same strict standards of self-abnegation as a trustee. Thus, this provision is an attempt to balance the partner's rights as owner and principal in the business with his or her duties and obligations as fiduciary and agent. That balance may be struck by recognizing a partner's right to act in his or her own self-interest as long as the action follows full disclosure and is fair to the partnership and the other partners. Hecker, The Kansas Revised Uniform Partnership Act, 68 J.K.B.A. 16, 32 (Oct. 1999). Review of the corporate self-interest cases cited by the parties in this case suggests that the plaintiffs must establish something above and beyond self-interest or self-dealing in this case involving a limited partnership in order to shift the burden of proof regarding the fairness of the transaction to the defendants. Under Richards, this may be accomplished by establishing a prima facie case of a breach of a fiduciary duty under K.S.A. 56a-404. Alternatively, the plaintiff must establish specific acts of fraud, misrepresentation, or other items of misconduct as set forth in Weinberger v. UOP, Inc., 457 A.2d 701, 703 (Del. 1983). Each will be discussed in turn.