In 2013 the Iowa Supreme Court evaluated “fairness” among minority and majority shareholders of a family farming corporation in the context of disagreements between second-generation cousin shareholders. The case is Baur v. Baur Farms, Inc. In Baur Farms, one of the cousins, who was not involved in operating the farm and received all of his stock by way of inheritance or gift, decided he wanted to be bought out. The corporate bylaws included a buy-out provision where the value of the shareholders’ stock was set at a value of equity interest determined by the Board of Directors at the end of the most recent fiscal year. That value apparently did not reflect the fair market value of the corporation’s underlying assets – the farm and negotiations to settle were unsuccessful.
The disgruntled cousin filed suit alleging the majority owners committed oppressive, malicious and fraudulent acts resulting in waste of the corporation’s assets. He sought dissolution of the corporation, payment of previously unpaid dividends or a buy-out of his stock at a fair value. The district court originally dismissed the case in favor of the majority owners and corporation. However, the Supreme Court reversed, holding that majority shareholders act oppressively when they fail to satisfy the reasonable expectations for a return on investment of a minority shareholder; specifically by refusing to buy out minority shareholder at fair value. The case was sent back to the district court for trial.
The Baur Farms opinion appeared to give great power to minority shareholders and became the subject of criticism among many farmers and professionals – particularly since the disgruntled cousin made no investment in the farm and appeared to have no reasonable expectations for a return under the corporation’s structure.
The July 2014 district court opinion, took the air out of the minority shareholder’s balloon. The court the corporation and majority owner did not engage in oppressive conduct because the minority shareholder had no reasonable expectations that could be violated. Expectations are only reasonable if they are made known to the other shareholders, and the only expectation in this instance was to be bought out under the bylaw valuation.
Further, the disgruntled shareholder remained quiet for many years following the adoption of the bylaws. He made no actual “investment” in the corporation because he received his stock by inheritance or gift. The court also noted the value established by the Board of Directors would be appropriate for the shareholder’s minority interest and for the built-in taxable gain in the corporation’s assets, which would have materialized if the corporation was liquidated. Thus, a fair price should be viewed as fair market value after accounting for applicable discounts (including tax).
Essentially, the district court found the Supreme Court’s opinion was not applicable because the facts presented to it were not those considered by the Supreme Court. The Supreme Court simply didn’t get the facts right.
There are still lessons to be learned from the Baur Farms saga. Corporations and majority owners cannot run roughshod of the business to the detriment of minority owners. However, appropriate buy-sell agreement planning, business succession planning and corporate governance can resolve many of these issues before they result in litigation.