Ward on Iowa Limited Liability Company Law

Iowa Court of Appeals Limits Reach of LLC Charging Orders

In Wells Fargo v. Continuous Control Solutions, Inc., No. 2-431/11-1285, file August 8, 2012, the Iowa Court of Appeals held that a court cannot compel an LLC subject to a charging order to provide quarterly financial statements to the judgment creditors so they could verify that no distributions had been made to the judgment debtors.

In rendering its opinion the court narrowly construed the meaning of “make all other orders necessary to give effect to the charging order.”  Iowa Code §489.503(2)(b).  The three-judge panel compared this section to Iowa Code Section 489.503(2)(a) which permits a receiver appointed by a court “to make all inquiries the judgment debtor might have made” and found that because subsection (b) does not “specifically authorize the requested disclosure,” the power to “make all other orders necessary” must not include ordering the periodic disclosure of financial information.  Apparently, all does not mean all to the court of appeals.

The court buttresses its conclusion by comparing holders of a lien to a transferee of an LLC interest.  Because Iowa Code Section 489.502(1)(c)(2) does not permit transferees to have access to information about the LLC except in case of dissolution and winding up, holders of a lien cannot have greater
rights.

But prohibiting access to information to transferees is related to their status as mere holders of an economic interest, without any management or governance rights.  In the case of a judgment creditor, granting them access to periodic financial statements is an enforcement tool to ensure compliance with a court order.

-Marc Ward

Appraisal Rights Cut Both Ways

If you represent a Delaware shareholder, be careful what you wish for when seeking post-acquisition appraisal.  You will receive what the court determines to be the fair value of your shares irrespective of the actual merger consideration.

Former shareholders and managers of a prison healthcare detention company recently sought appraisal of their shares by the Delaware Chancery Court following a $40 million acquisition of the company.  Gearreald v. Just Care, Inc., No.5233-VCP, 2012 WL 1569818 (Del. Ch. Apr. 30, 2012).  Unfortunately for the dissenting shareholders pursuing appraisal, the court found the fair value of the company to be only $34 million.  

Immediately following the acquisition, $6 million of the $40 million merger consideration was placed in an escrow account to cover any claims brought against the company in the upcoming years, including claims for appraisal such as this. 

Therefore, if the dissenting shareholders would have been able to prove the fair value of the company was over $40 million at the time of the merger, they would have been entitled to additional consideration in an amount equal to the difference between the fair value of the company and $40 million (up to the $6 million in escrow). 

This proved not to be the case here, however. Since the court found the fair value of the company to be only $34 million, the result is that the dissenting shareholders received less consideration then they would have had they not sought appraisal. 

On top of that, the consenting shareholders reaped the benefits of this decision, as they received their original pro rata share of the merger consideration plus a share of the excess consideration
forfeited by the dissenting shareholders as consequence of seeking appraisal.

This could also happen under the Model Business Corporation Act, adopted by Iowa.  Dissenting shareholders are entitle to payment of the fair value of their shares by the corporation once the shareholders have perfected their dissenters rights.  Although likely to be the same as the merger consideration, and certainly not more, it doesn't have to be (see the definition of "fair value" in Iowa Code Section 490.1301).  And court could confirm this amount.

-Marc Ward (aided by summer associate, Margret White)