Opinion ID: 2570185
Heading Depth: 1
Heading Rank: 4

Heading: McMinn II

Text: {19} In McMinn II, the controlling shareholders of MBF Manufacturing (MBF), a closely-held corporation with only three shareholders, instituted a merger transaction designed to eliminate the interest of McMinn as the non-controlling shareholder. McMinn II, 2007-NMSC-040, ¶¶ 8-10. Known as a freeze-out transaction, the merger was accomplished by the controlling shareholders setting up a shell corporation owned by them alone, and then causing MBF to merge with the shell corporation. Id. ¶ 1. One condition of this merger was the elimination of McMinn's interest by the forced cancellation of his shares through a cash purchase. Id. ¶¶ 8-10. Prior to the merger, McMinn had complained that the controlling shareholders were paying themselves excessive salaries and improperly refusing to declare dividends to the shareholders. Id. ¶ 7. {20} After the freeze-out transaction was complete, McMinn rejected the amount offered for the fair value of his shares and filed suit for breach of fiduciary duty against MBF and the controlling shareholders. Id. ¶¶ 10-11. A jury found that the controlling shareholders had breached their fiduciary duties to McMinn and awarded McMinn the fair value of his shares as calculated by his expert, taking into account the loss of value to the corporation caused by the payment of excessive salaries, along with $20,000 in punitive damages. Id. ¶¶ 12, 46-47. On appeal, MBF argued that the statutory appraisal remedy was McMinn's exclusive remedy, and thus McMinn was bound by the amount offered by MBF because he failed to follow the proper procedures for seeking an appraisal. See id. ¶ 13. {21} The exclusivity provision of New Mexico's dissenter's rights statute provides that [a] shareholder of a corporation who has a right under this section to obtain payment for his shares shall have no right at law or in equity to attack the validity of the corporate action that gives rise to his right to obtain payment, nor to have the action set aside or rescinded, except when the corporate action is unlawful or fraudulent with regard to the complaining shareholder or to the corporation. Section 53-15-3(D). Interpreting this provision, the Court of Appeals in McMinn I agreed with MBF, holding that appraisal was McMinn's exclusive remedy and that the allegations of breach of fiduciary duty on the part of the controlling shareholders were insufficient to bring the case within the statutory exception to exclusivity for fraudulent or unlawful conduct. McMinn I, 2006-NMCA-049, ¶¶ 29-36. Thus, the Court of Appeals vacated the jury verdict in McMinn's favor. Id. ¶ 36. {22} We reversed the Court of Appeals and held that appraisal is not the exclusive remedy in freeze-out transactions designed to eliminate the interest of minority or non-controlling shareholders. McMinn II, 2007-NMSC-040, ¶¶ 13, 54. We began by examining certain fundamental principles of corporate law relating to fiduciary duties, noting that the transaction designed by the controlling shareholders of MBF, whereby they caused the original corporation to merge with a shell corporation also controlled by them and created for their benefit, was a conflict of interest transaction. Id. ¶¶ 18-21. We observed that such transactions are traditionally held up to careful scrutiny under fiduciary duty principles implicating the duty of loyalty. Id. ¶ 21. We then reviewed both the language and the purpose of the New Mexico dissent and appraisal statute to determine whether the Legislature intended that a former shareholder, whose interest in a company had been eliminated by a freeze-out merger, was relegated to an appraisal action as his sole remedy. Id. ¶¶ 23-30. If the Legislature intended to limit the relief in a freeze-out transaction, then the shareholder, upon failing to follow the statutory procedures for seeking an appraisal, would be bound by the offer made by the corporation for the value of his shares. See § 53-15-4(A) (stating that any shareholder who fails to make a demand for payment for his shares within the prescribed time shall be bound by the term of the proposed corporate action). {23} Section 53-15-4(B) provides that when a shareholder does not file a demand for an appraisal, his right to appraisal ceases and he is restored to his shareholder status. See McMinn II, 2007-NMSC-040, ¶ 24. However, if the transaction that triggers the shareholder's appraisal rights is designed to force him to surrender his interest in the corporation and accept cash for his shares, then it is impossible for him to be restored to his shareholder status. Id. ¶ 26. Thus, we observed that, as applied to merger transactions, the statute appears to be designed for an arms-length merger between two unrelated corporations, as opposed to a merger between two corporations under common control for the sole purpose of eliminating the interests of the non-controlling shareholder. Id. ¶ 31. If the statutory appraisal remedy were the exclusive remedy for non-controlling shareholders whose interests are eliminated by a freeze-out merger transaction, the statute could be used by those in control to oppress the minority while escaping the close scrutiny typically accorded transactions involving conflicts of interest and self-dealing. Id. ¶¶ 29-30.