Opinion ID: 2608643
Heading Depth: 2
Heading Rank: 1

Heading: shareholder remedies

Text: In a corporation with publicly traded stock, dissatisfied shareholders can sell their stock on the market, recover their assets, and invest elsewhere. In a close corporation [3] there is not likely to be a ready market for the corporation's shares. The corporation itself, or one of the other individual shareholders of the corporation, who are likely to provide the only market, may not be interested in buying out another shareholder. If they are interested, majority shareholders who control operate policy are in a unique position to squeeze out a minority shareholder at an unreasonably low price. [4] From a dissatisfied shareholder's point of view, the most successful remedy is likely to be a requirement that the corporation buy his or her shares at their fair value. Ordinarily, there are four ways in which this can occur. First, there may be a provision in the articles of incorporation or by-laws that provide for the purchase of shares by the corporation, contingent upon the occurrence of some event, such as the death of a shareholder or transfer of shares. Second, the shareholder may petition the court for involuntary dissolution of the corporation. Third, upon some significant change in corporate structure, such as a merger, the shareholder may demand a statutory right of appraisal. Finally, in some circumstances, a purchase may be justified as an equitable remedy upon a finding of a breach of a fiduciary duty between directors and shareholders and the corporation or other shareholders. It does not appear from the record that there is any provision in the articles of incorporation or by-laws which would allow Muir to force Alaska Plastics to purchase her shares. Muir has not suggested that there is such provision, and we, therefore, do not consider the availability of this first method. As to the second method, Alaska's corporation code provides in AS 10.05.540(2) that a shareholder may bring an action to liquidate the assets of a corporation upon a showing that the acts of the directors or those in control of the corporation are illegal, oppressive or fraudulent... . A shareholder may also seek liquidation when corporate assets are being misapplied or wasted. AS 10.05.540(4). Upon a liquidation of assets all creditors and the cost of liquidation must be paid and the remainder distributed among all the shareholders according to their respective rights and interests. AS 10.05.561. There is no indication whether Muir would have received more or less than the $32,000 price for her shares ordered by the court if Alaska Plastics had been liquidated. Liquidation is an extreme remedy. In a sense, forced dissolution allows minority shareholders to exercise retaliatory oppression against the majority. Absent compelling circumstances, courts often are reluctant to order involuntary dissolution. E.g., Capitol Toyota v. Gervin, 381 So.2d 1038, 1039 (Miss. 1980); Baker v. Commercial Body Builders, Inc., 264 Or. 614, 507 P.2d 387, 395-97 (1973); Browning v. C&C Plywood Corp., 248 Or. 574, 434 P.2d 339, 343 (1967). [5] As a result, courts have recognized alternative remedies based upon their inherent equitable powers. Thus in Baker, interpreting a statute substantially similar to AS 10.05.540, the court authorized numerous alternative remedies for oppressive or fraudulent conduct by the majority. Among those would be: an order requiring the corporation or a majority of its stockholders to purchase the stock of the minority shareholders at a price to be determined according to a specified formula or at a price determined by the court to be a fair and reasonable price. (footnote omitted). Baker, 507 P.2d at 396. The same court applied that remedy in Delaney v. Georgia-Pacific Corp., 278 Or. 305, 564 P.2d 277, 288-89 (1977). We are persuaded by Baker and conclude that Muir's request in her amended complaint for liquidation, although not actively pursued, could justify the trial court's order as an equitable remedy less drastic than liquidation. To prevail on this basis, Muir must establish on remand that the acts of Stefano, Gillam and Crow were illegal, oppressive or fraudulent, AS 10.05.540(2), or alternatively, constituted a waste or misapplication of corporate assets. AS 10.05.540(4). Because the trial court did not reach the issue, we express no opinion here on whether Muir has satisfied the statutory standards of AS 10.05.540. The third method of forcing a corporation to purchase a minority shareholder's shares is a statutory appraisal remedy, which may be available under the Alaska Business Corporation Act in two circumstances where there is some fundamental corporate change. The remedy is available upon the merger or consolidation with another corporation, AS 10.05.417, or upon a sale of substantially all of the corporation's assets. AS 10.05.447. There is no suggestion that either statute is applicable in this case. In some circumstances, however, courts have found that a corporate transaction so fundamentally changes the nature of the business that there is a de facto merger which triggers the same statutory appraisal remedy. [6] The possibility of a de facto merger was alleged in the plaintiff's complaint and the trial court considered it before instructing the jury, but concluded that it was not applicable. Muir's principal contention was that the acquisition of Valley Plastics amounted to such a fundamental corporate change that she should have had an appraisal right. In her cross-appeal, Muir did not assign the trial judge's dismissal of her de facto merger claim as error, nor has she argued it on appeal. Nevertheless, the remedy ordered by the trial judge is so similar to an appraisal remedy that we have examined the de facto merger doctrine more carefully because it might serve as an alternative ground for affirming the judgment of the trial court, see Carlson v. State, 598 P.2d 969, 973 (Alaska 1979); Ransom v. Haner, 362 P.2d 282, 285 (Alaska 1961). In a frequently cited case, Farris v. Glen Alden Corp., 393 Pa. 427, 143 A.2d 25 (1958), the Pennsylvania Supreme Court concluded that, under some circumstances, a shareholder should have an appraisal right even though the strict language of a statute might confine the remedy to a shareholder in the selling corporation only. Glen Alden, a Pennsylvania coal mining company, bought List Industries by issuing its own stock to List. List in turn distributed the Glen Alden stock to its shareholders, who traded their List stock for Glen Alden stock. As a result of the transaction, the former shareholders of List held over three-fourths of the outstanding shares of Glen Alden and controlled eleven of the seventeen directors. The court concluded that List was in reality the purchasing corporation and that the transaction should have been done in accordance with the statutory requirements for a merger. Although we might follow Farris in an appropriate case, we do not believe the de facto merger doctrine is applicable here. Muir never objected to the transaction, as did the plaintiffs in Farris. In fact, at the 1975 shareholders meeting Muir voted to ratify the transaction. There is no indication that her stock holdings have been diluted, [7] her proportionate interest in Valley Plastics is the same as her interest in Alaska Plastics. There has been no change in the Board of Directors or corporate officers. Alaska Plastics and Valley Plastics conducted the same type of business. The conversion of Alaska Plastics into a holding company had nothing to do with the purchase of Valley Plastics, but was a result of a fire that destroyed the Alaska Plastics plant. Both corporations have retained their separate corporate status. In short, the transaction here would have been little different had Alaska Plastics purchased any other major asset. Therefore, the judgment of the trial court cannot be affirmed on this alternative ground. We turn, then, to the fourth possibility by which a minority shareholder may force a corporation to purchase his or her shares. Two leading cases have concluded that transactions by one group of shareholders that enable it to derive some special benefit not shared in common by all shareholders should be subject to close judicial scrutiny. The Massachusetts Supreme Judicial Court concluded that shareholders in closely held corporations owe one another a fiduciary duty: Because of the fundamental resemblance of the close corporation to the partnership, the trust and confidence which are essential to this scale and manner of enterprise, and the inherent danger to minority interests in the close corporation, we hold that stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another. In our previous decisions, we have defined the standard of duty owed by partners to one another as the `utmost good faith and loyalty.' (footnotes and citations omitted). Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505, 515 (1975). The California Supreme Court concluded that a controlling group of shareholders owes a similar duty to minority shareholders. In Jones v. H.F. Ahmanson & Co., 1 Cal.3d 93, 81 Cal. Rptr. 592, 460 P.2d 464 (1969), the court held that a control block of stock could not be used to give the majority benefits that were not shared with the minority. We believe that Donahue and Ahmanson correctly state the law applicable to the relationship between shareholders in closely held corporations, or between those holding a controlling block of stock, and minority shareholders. We do not believe, though, that the existence and breach of a fiduciary duty among corporate shareholders supports the appraisal remedy ordered by the trial court in this case. The trial judge made no findings of fact or conclusions of law, but the basis for his decision is clear from extensive discussions that took place prior to instructing the jury and the form of the judge's final order. The court concluded that once the corporation made an offer to Muir it was under an obligation to purchase her stock at a fair price, regardless of what price the corporation had initially offered. Had Muir actually sold the stock at an unfairly low price, she might have brought an action to set the transaction aside. The existence of a fiduciary duty between shareholders would justify careful scrutiny and shifting the burden onto the defendants to show that the transaction was fair. 13 W. Jaeger, Williston on Contracts § 1626A at 806-08 (3d ed. 1970). In this case, however, Muir rejected both of the corporation's offers. We are not aware of any authority which would allow a court to order specific performance on the basis of an unaccepted offer, particularly on terms totally different from those offered. Such a rule would place a court in the impossible position of making and enforcing contracts between unwilling parties. Donahue and Ahmanson do suggest the appropriate form of a remedy in this case, however. In Donahue, one of the controlling shareholders caused the corporation to purchase forty-five of his shares, but then refused to buy an equal number of shares held by a minority shareholder. The court first noted the benefit that a shareholder in a close corporation gained by focusing the corporation to buy his shares. The benefits conferred by the purchase are twofold: (1) provision of a market for shares; (2) access to corporate assets for personal use. By definition, there is no ready market for shares of a close corporation. The purchase creates a market for shares which previously had been unmarketable. It transforms a previously illiquid investment into a liquid one. 328 N.E.2d at 518. The court then went on to conclude that where a controlling shareholder took advantage of such a special benefit, the fiduciary duty owed to other shareholders required that the corporation offer such a benefit equally: The rule of equal opportunity in stock purchases by close corporations provides equal access to these benefits for all stockholders. Id. at 519. In Ahmanson, the controlling group of shareholders transferred its control block of stock to a holding company which in turn offered its stock to the public. There were relatively few shares of stock in the active company in which the plaintiffs owned shares, and the price of each share was so high that they had little market appeal. The holding company, on the other hand, offered numerous shares at far lower prices. Because of the ready market for holding company shares, the controlling shareholders were able to sell part of their investment in the active company through the holding company at a huge profit. The court held that the majority shareholders had to offer this same opportunity to minority shareholders. [8] As we read Muir's complaint, the essence of her action is that Stefano, Gillam and Crow enjoyed benefits from the corporation which should have been shared equally with her. None of the other shareholders of Alaska Plastics have sold their stock to the corporation so it would not be appropriate to order the corporation to purchase Muir's stock. Unlike Donahue, this was not one of the benefits which the majority received and which they did not share with Muir. There was evidence, however, that the corporation paid Stefano, Gillam and Crow director's fees. Gillam received a substantial salary. The corporation apparently paid some of the personal expenses of the directors' wives. Regardless of how the corporation labels these expenditures, if they were not made for the reasonable value of services rendered to the corporation, some portion of these payments might be characterized as constructive dividends. The analysis of such corporation payments is similar to the analysis of transactions to determine tax liability. Dividend distributions are not deductible by a corporation. Therefore, taxpayers in close corporations have made numerous attempts to structure transactions in a way which will allow a corporate deduction. Courts have not allowed the form of the transaction to prevent tax liability when the transaction is in substance a distribution of dividends. See, e.g., American Properties, Inc. v. Commissioner, 262 F.2d 150, 151 (9th Cir.1958) (payments for taxpayer's speed boat a dividend); Greenspon v. Commissioner, 229 F.2d 947 (8th Cir.1956) (payments for a horticultural show place not a corporate expense). We think a similar analysis should apply to payments which exclude some shareholders in a closely held corporation. [9] Such transactions should be examined to determine whether they are in fact a distribution of dividends, and if so the excluded shareholder must participate equally in the payments received by other shareholders. We express no opinion as to whether Muir has shown that these payments were a distribution of dividends, whether she was deprived of other corporate benefits which she should have shared in equally with the other three shareholders, or whether the majority shareholders violated AS 10.05.540. The case must be remanded to the trial court to make appropriate findings of fact and conclusions of law based upon the present record.