Recently, the Michigan Court of Appeals addressed three issues commonly raised in shareholder oppression or member oppression actions: (1) whether a plaintiff must prove that the defendant intentionally engaged in unfair and oppressive conduct; (2) whether a court can order a specific remedy for the plaintiff on the plaintiff’s motion for summary disposition; and (3) whether valuations of a company in oppression litigation must include discounts for lack of control and lack of marketability. Franks v Franks, unpublished opinion per curiam of the Court of Appeals dated September 24, 2019 (Docket No. 343290).
Franks involved allegations of shareholder oppression in a family-owned machine tool company, Burr Oak Tool, Inc. Between 1950 and 2004, Burr Oak had made annual distributions to its shareholders in all but five years. In 2007, distributions ceased after the passing of Burr Oak’s founder. Burr Oak’s new CEO and Chairman of the board of directors attributed the stoppage to a “tremendous outflow of cash related to” the late company-founder’s estate. By May 2012, Burr Oak had accumulated more than $20 Million in cash and a valuation of the company requested by Burr Oak’s CEO reported a value of $46,125,355 or approximately $598 per share. Six months later, Burr Oak offered to purchase shares for $62 per share without any valuation to support that offer. Communications between Burr Oak’s accountant and CEO described the $62 offer as “’a good plan’ because the nonvoting members were astute enough to realize that their shares had no value unless a different buyer were to offer more,” and that “if no dividends are being paid and there are no redemptions being made, then nobody else is going to buy the stock.” The nonvoting stockholders did not accept the $62 offer, or subsequent offers of $141.26 and $248 per share.
Litigation then ensued. The plaintiffs, non-voting Class B and C stockholders, sued the Class A voting shareholders and control-group defendants. Among the claims asserted was an action for shareholder oppression under MCL 450.1489, alleging that defendants’ conduct was “willfully unfair and oppressive to the” non-controlling Class B and C shareholders. Cross motions for summary disposition were filed, including plaintiffs’ request for summary disposition on their oppression claim arguing that “undisputed evidence shows that defendants tried to implement an unfair stock redemption plan and wrongfully withheld the payment of dividends for the purpose of squeezing the nonvoting stock holders out of the corporation.” Plaintiffs also argued that the circuit court was bound to order a buyout of their stock at fair value without lack of marketability or lack of control discounts.
After denying defendants’ motion, the circuit court granted summary disposition to plaintiffs, finding that “the controlling shareholders were not in fact dealing fairly with the nonvoting shareholders,” and that “there has been suppression of the minority shareholder[s].” The court then ordered that Burr Oak was required to purchase plaintiffs’ stock at a price to be determined at an evidentiary hearing. Id. At that hearing, plaintiffs and defendants offered competing expert testimony from certified public accountants regarding the per-share value of plaintiffs’ stock. Plaintiffs’ expert valued the stock at $712 per share; Defendants’ expert valued the stock at $632 per share, which he then discounted to $398 for lack of marketability. Id. Following the hearing, the circuit court sided with the plaintiffs and their expert, finding a per-share value of $712 and holding that “it could not apply a discount to lower the fair value of the shares.” Id. The court also ordered Burr Oak to complete the purchase of plaintiffs’ shares within two years and ordered it to pay equitable interest and plaintiffs’ attorney fees. Defendants appealed.
The Michigan Court of Appeals reversed, holding that defendants had demonstrated a genuine issue of material fact “as to whether their acts were fraudulent or willfully unfair and oppressive within the meaning of MCL 450.1489(1).” The Court rejected plaintiffs’ argument that no intent to oppress was required under the statute, reasoning it “would transform the shareholder-oppression statute into a strict liability statute.” The Court explained that “[t]he Legislature’s decision to group ‘willfully unfair and oppressive’ acts with acts that are illegal or fraudulent strongly suggests that the Legislature required proof of an intent to act in a manner that was unfair and oppressive to the shareholder.” Furthermore, existing Michigan law recognized that “[a]n act is willfully done when taken with the intent to do something specific, that is, the action is undertaken with the specific intent to bring about the particular result the statute seeks to prohibit.” Distilled together, the Court “h[e]ld that, with regard to acts that are willfully unfair and oppressive, the complaining shareholder must prove that the directors or persons in control of the corporation engaged in a ‘continuing course of conduct’ or took ‘a significant action or series of actions’ that substantially interfered with the interests of the shareholder as a shareholder, and that they did so with the intent to substantially interfere with the ‘interests of the shareholder as a shareholder.’”
The Court agreed that if left unrebutted, “[t]aken together, [plaintiffs’] evidence established that defendants acted in concert to take acts that were willfully unfair and oppressive to plaintiffs as shareholders.” Defendants, however, had offered evidence “that Burr Oak had legitimate business reasons for withholding the payment of dividends,” including concerns over its cash position, and that its low but escalating stock-purchase offers were a business tactic. “Defendants’ evidence, if believed, would support a finding that defendants caused Burr Oak to hold its cash rather than pay dividends to its shareholders for legitimate business reasons and not with the intent to substantially interfere with plaintiffs’ interests as shareholders.” Summary disposition was therefore improper, because “defendants established a question of fact as to whether their acts were fraudulent or willfully unfair and oppressive.”
Turning to the court-ordered remedy, the Court of Appeals further held that the trial court “erred by granting summary disposition on the remedy because the record had not been developed sufficiently to permit the court to select an appropriate remedy.” Noting the wide-ranging equitable relief available to a circuit court upon a finding of oppression, the Court reasoned that even if defendants’ evidence had failed to create a genuine issue of material fact as to liability for oppression, it “was evidence that implicated the potential for alternate relief.” Citing potential harm to Burr Oak and to “hundreds of employees in the local community,” the Court described the mandate that Burr Oak purchase the plaintiffs’ stock for $712 per share at the summary disposition stage as a “drastic remedy.” The Court concluded that “given the conflicting evidence before the trial court, it could not decide as a matter of law what remedy best fit the equities of the case,” and summary disposition on this issue was also improper.
The Court, however, rejected defendants’ request to impose a rigid rule that would require circuit courts to discount a stock purchase remedy for lack of marketability and control. While noting that the language of MCL 450.1489(3) speaks in terms of a “purchase at fair value,” the Court concluded that “fair value” was not defined and “nothing within the statute precludes a trial court from considering fair market value when determining fair value,” or “applying discounts when crafting a remedy.” This includes discounts common in a fair market valuation, which “take into consideration the fact that a ready, willing, and able buyer might discount the value of the shares on the basis of limitations inherent in the shares.” Recognizing the statutory grant to the circuit courts of equitable power to “order or grant relief as it considers appropriate,” the Court “conclude[d] that a trial court is required to order an ‘appropriate’ remedy, which may include an order to purchase at ‘fair value’ or any other value that the court concludes is appropriate under the totality of the circumstances.” Therefore, “the trial court had the authority to value the shares without discounts under MCL 450.1489(1)(e), but was not required to do so.”
As is evident from the above discussion, Franks covers a lot of ground. Many of the issues touched on were matters of first impression in Michigan, for which Franks now provides binding guidance. While Franks specifically dealt with oppression of shareholders of a corporation, its reasoning would apply equally to oppression claims under MCL 450.4515(1) to redress “acts of the managers or members in control of the limited liability company are illegal or fraudulent or constitute willfully unfair and oppressive conduct toward the limited liability company or the member.”
Authored by: Matthew D. Smith