Posted on 10/02/2018 at 10:47 AM by Laura Wasson
On September 28, 2018, the Eighth Circuit affirmed a Nebraska district court’s ruling for the defendant majority shareholder in an economic duress case, Rasby v. Pillen, 2018 WL4654718. The case centered on a minority shareholder, Deborah Rasby’s, sale of her stock in various entities to the majority shareholder, James Pillen. Rasby sold her shares for $2,350,000, which she claimed was substantially below market value.
The facts will sound familiar to any minority shareholder that has struggled with majority oppression. Rasby had been with the Company, Progressive Swine Technologies (“PST”) since 1994, when she acquired her ownership interest without a cash investment. She retired in May 2011 after her working relationship with Pillen deteriorated. Until her retirement, she had received distributions from PST that covered the income taxes she had to pay as a result of her investment. After Rasby retired, Pillen stopped these distributions, leaving her fearful should could not pay taxes on her PST investment.
Soon after retirement, Rasby received a letter from Pillen stating that he would either liquidate PST and pay Rasby a $50,000 distribution, or purchase Rasby’s stock for $1,881,029. Rasby’s attorney advised her that she could either (1) sell her interests to Pillen, (2) sell to a third party, or (3) sue Pillen for minority shareholder oppression. She decided to sell her shares and, after negotiating the price, entered into a Unit Purchase Agreement wherein Rasby and Pillen mutually released all claims against each other.
Rasby then sued, claiming Pillen’s actions created “significant economic duress” that forced her to sell her stock to her financial detriment. She claimed the economic duress resulted from her lack of realistic options: unable to afford shareholder oppression litigation or sell her shares on the open market due to Pillen’s actions, she was forced to sell to Pillen himself on unfair terms. The Eighth Circuit affirmed the district court’s dismissal of her claims in an insightful opinion about what constitutes “economic duress” for minority shareholders.
Notably, the court found that being an experienced businesswoman, represented by an attorney, participating in the negotiations with Pillen, and rejecting the opportunity to get an independent valuation for her shares cut against Rasby’s argument that she was forced to sell her interest. As did the fact that Rasby contributed to her own economic pressure by voluntarily retiring from a position that paid her $85,000 a year. The crux of the holding was simply that Rasby had alternatives to selling her shares, like litigation, and she failed to pursue them. The reasonableness of her decision not the pursue litigation, which was based primarily on cost, did not matter. Finally, the court found that it was neither “unfair nor inequitable” for Pillen to seek to purchase the interest of a minority shareholder who was no longer actively involved in the enterprise.
The takeaway: claiming economic duress as an alternative to minority oppression will not work if the shareholder (i) failed to pursue viable alternatives to the allegedly coercive action, (ii) rejected an independent valuation, and (iii) contributed to their own economic duress by, for instance, retiring from employment. This case demonstrates that being a minority shareholder is hard and it’s not getting any easier. For questions about your options as a minority business owner, contact Dickinson Attorney Laura Wasson.