Is this finally the end for the Baur Farms oppression claim?

Mollie Pawlosky Iowa Banking Law Dickinson Law Des Moines, Iowa

Posted on 08/02/2016 at 12:00 AM by Mollie Pawlosky

Readers monitoring suits seeking corporate dissolution because of oppression well remember Baur v. Baur Farms, Inc., 832 N.W.2d 663, 673 (Iowa 2013), where the Iowa Supreme Court ruled, “majority shareholders act oppressively when, having the corporate financial resources to do so, they fail to satisfy the reasonable expectations of a minority shareholder by paying no return on shareholder equity while declining the minority shareholder’s repeated offers to sell shares for fair value.”

The Iowa Supreme Court remanded Baur to the district court, directing that the court take additional evidence to determine the fair value of the minority shareholder’s equity interest. If, after taking additional evidence and applying the “reasonable expectation standard,” the district court found that the entity acted oppressively, the court could then “resolv[e] the dispute.”

The transcript from the first trial in 2011 was part of the record in the second Baur trial, held in March 2014. Additionally, a CPA testified concerning the taxes the corporation would pay if liquidated, and an attorney also testified about the liquidated value of the corporation.

The district court found the fair value of the minority shareholder’s shares was his proportionate share of the market value of the corporation’s assets, discounted for their liquidation value. The court held that the minority shareholder did not have a reasonable expectation that his shares could be redeemed for a greater amount, and his request to have the entity purchase his shares for $1.8 million was unreasonable. The court also noted the entity did not have the resources to pay $1.8 million for the shares. Because his demand exceeded the fair value of his equity interest, the minority shareholder had not proven oppression, and the suit for dissolution was dismissed; the minority shareholder appealed.

The district court’s specific direction was to determine, “whether the last position taken by [the corporation] during negotiations on the price offered for [the minority’s] interest in the corporation was outside the range of fair value and incompatible with the reasonable expectations of a shareholder in [the minority’s] position.” The corporation’s last position was its failure to accept the minority’s offer to sell for $1.8 million.

On appeal, the minority shareholder argued that the court improperly considered the corporation’s book value; the Iowa Court of Appeals, however, held that although the district court discussed book value, the court ultimately found the fair value of the minority’s shares to be an amount not exceeding his proportionate share of the market value of BFI’s assets, discounted to their liquidation value.

The Court of Appeals further ruled that it was legitimate to consider the impact of redemption on the other shareholders, because whether a corporation has the financial resources to purchase a minority shareholder’s shares is a legitimate consideration under the Baur holding. The district court did not improperly include a minority discount, and it was appropriate for the court to apply a liquidation discount. The fair value of minority shares should take into consideration the taxes and other costs that would result from liquidation of the corporation.

Because the majority shareholders had not, having the corporate financial resources to do so, failed to satisfy the reasonable expectations of a minority shareholder by paying no return on shareholder equity, or declined the minority shareholder’s repeated offers to sell shares for fair value, the majority shareholders had not acted oppressively, and the district court was affirmed.

Baur filed his petition in October 2007. Those monitoring the case wait to see if Baur seeks further review by the Iowa Supreme Court or, if after nearly nine years, the matter has finally concluded. For questions regarding Baur v. Baur Farms, Inc. or other questions regarding commercial litigation, contact Mollie Pawlosky.

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