The Iowa Court of Appeals has issued another interesting opinion. In Baur v. Baur Farms, Inc., (No. 9-931/09-0480, February 10, 2010), the court considered whether the statute of limitations had run on a claim of minority shareholder oppression. The applicable statute of limitations in this case is five years as set forth in Iowa Code Section 614.1(4).
The plaintiff in this case owned a minority interest in a family farm corporation. The corporation was incorporated in 1966 by two brothers. Because only one of the two brothers had a child interested in farming, the brothers agreed that the stock would be owned 51% to 49% with the majority interest going to the brother with the son willing to continue the farm. The plaintiff in this case is the son of the original minority shareholder and owns 26.29% of the stock. The defendant owns the 51% inherited from his father.
The court noted that certain alleged oppressive acts by the majority shareholder were discrete acts clearly time barred (removal of the plaintiff as an officer, land purchases, use of a corporate vehicle, expansion of the board of directors). However, the plaintiff also alleged that the defendant’s refusal on numerous occasions, most recently 2007, to purchase his minority interest without a minority discount was also an oppressive act. The court agreed that the defendant’s insistence on a minority discount along with other potentially wrongful conduct could be oppressive and raised a sufficient issue of material fact to avoid summary judgment on the basis of the statute of limitations.
The problem with the court’s analysis is its reliance on Iowa Code Section 490.1301(4). This section defines “fair value” of a shareholder’s stock in the context of a shareholder vote that if approved would force a change in the status of a minority shareholder. The specific actions outlined by the Code are mergers, share exchanges, sales of assets, reductions of a shareholder’s shares to a fraction if the corporation can then purchase the fractional interest, and conversions to another entity. In each of these situations, the minority shareholder’s interest in the corporation is being changed by the actions of the majority. In Baur the defendant was merely offering a counterproposal. The status of the plaintiff as a shareholder was not being affected.
The court’s reliance on Security State Bank v. Ziegeldorf, 554 NW 2d 884 (Iowa 1996) is likewise inappropriate. In that case the minority shareholder was forced by the actions of the majority shareholder to be paid for his stock subject to a discount for lack of marketability as a result of a reverse stock split.
By applying the definition of fair value outside the context of 490.1301 et seq the court of appeals is in effect saying that majority and minority shareholders cannot freely negotiate a price for the minority’s shares; the price is fixed at the statutory definition of fair value.
How far can this case go? Does it mean that a majority shareholder must accept an offer to buy a minority shareholder’s shares at fair value? That is, can a majority shareholder just say no and refuse any offer? Or would such refusal be considered oppressive conduct by the court of appeals?
-Marc Ward
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