IN THE COURT OF APPEALS OF IOWA
No. 14-1412
Filed July 27, 2016
JOHN R. BAUR,
Plaintiff-Appellant,
vs.
BAUR FARMS, INC., and
ROBERT F. BAUR,
Defendants-Appellees.
________________________________________________________________
Appeal from the Iowa District Court for Madison County, Gary G. Kimes,
Judge.
Plaintiff appeals the district court’s decision denying his petition for
dissolution of a closely-held family farm corporation. AFFIRMED.
Douglas A. Fulton and Allison M. Steuterman of Brick Gentry, P.C., West
Des Moines, for appellant.
David L. Charles of Crowley Fleck, P.L.L.P., Billings, Montana, and Mark
McCormick of Belin McCormick, P.C., Des Moines, for appellee.
Heard by Vogel, P.J., and Doyle and Bower, JJ.
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BOWER, Judge.
Plaintiff John Baur (Jack) appeals the district court’s decision denying his
petition for dissolution of a closely-held family farm corporation. The district court
concluded the corporation’s decision not to purchase Jack’s shares of stock for
an amount in excess of the fair value of his interest in the corporation did not
show oppression by the corporation. We affirm the district court’s conclusion.
I. Background Facts & Proceedings
Jack is a minority shareholder, owning 26.29% of the shares in Baur
Farms, Inc. (BFI), a family farm corporation. Jack is a director of the corporation
and receives $250 per year in director’s fees but is not an officer of the
corporation. James Baur, Jack’s nephew, is the current farm manager. Robert
Baur (Bob), who is Jack’s cousin, is the majority shareholder in the company and
was formerly the farm manager. For several years, Jack attempted to have
either BFI or the other shareholders purchase his shares. The parties negotiated
over the period from 1992 to 1997, but there was no agreement on a suitable
purchase price. The parties disagreed concerning the value of BFI and the value
of Jack’s shares.
On August 7, 2007, Jack offered to sell his shares to BFI for $1,825,000.
BFI did not respond to his offer, and on October 10, 2007, Jack filed an action
seeking dissolution of the corporation under Iowa Code section 490.1430 (2007),
based on a claim of oppressive conduct. He also raised a claim against Bob for
breach of fiduciary duty. The district court granted summary judgment to
defendants, finding Jack’s claims were barred by the statute of limitations. We
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reversed the decision of the district court and remanded for further proceedings.1
See Baur v. Baur Farms, Inc., No. 09-0480, 2010 WL 447063, at *11 (Iowa Ct.
App. Feb. 10, 2010).
The remanded case was tried to the court in equity on March 1, 2011.
After Jack presented evidence, BFI and Bob moved for a directed verdict. The
court granted the motion and dismissed the action. The court denied Jack’s
motion to enlarge or amend brought pursuant to Iowa Rule of Civil Procedure
1.904(2). Jack appealed.
On appeal, the Iowa Supreme Court found, “every shareholder may
reasonably expect to share proportionally in a corporation’s gains.” Baur v. Baur
Farms, Inc., 832 N.W.2d 663, 673 (Iowa 2013). “When this reasonable
expectation is frustrated, a shareholder-oppression claim may arise.” Id. The
court concluded, “The determination of whether the conduct of controlling
directors and majority shareholders is oppressive under section 490.1430(2)(b)
and supports a minority shareholder’s action for dissolution of a corporation must
focus on whether the reasonable expectations of the minority shareholder have
been frustrated under the circumstances.” Id. at 674. The court also stated, “We
hold that majority shareholders act oppressively when, having the corporate
financial resources to do so, they fail to satisfy the reasonable expectations of a
minority shareholder by paying no return on shareholder equity while declining
the minority shareholder’s repeated offers to sell shares for fair value.” Id.
The supreme court determined:
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The district court denied Bob’s motion seeking sanctions against Jack. We affirmed
the district court’s decision on this issue.
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Because BFI is a closely held corporation, Jack has no access to
an active market in its shares that might allow his realization of a
return on his equity position. The negotiations for the sale of Jack’s
stock to the other shareholders at a mutually agreed upon price
have been unavailing. Without ready access to an active market,
Jack has effectively been precluded from capturing the increased
value of his shares because BFI has retained and reinvested its
revenue in the company over the years rather than paying out
dividends. As a minority shareholder and nonofficer, Jack will
remain effectively precluded from capturing any return on his
shareholder equity for as long as the board concludes income
distributions are inappropriate.
As a minority shareholder, Jack also lacks voting power to
force the board of directors to set a book value that is reasonably
related to the fair value of the company’s assets. Yet, we believe
the record is not adequate to determine whether the price offered
by BFI for the purchase of Jack’s shares is so inadequate under the
circumstances as to rise—when combined with the absence of a
return on investment—to the level of actionable oppression.
Id. at 676-77 (citations omitted).
The court determined the case should be reversed and remanded, stating:
Although we have defined the legal standard for adjudicating
Jack’s claim of oppression, we express no view on the question of
whether the last position taken by BFI during negotiations on the
price offered for Jack’s interest in the corporation was outside the
range of fair value and incompatible with the reasonable
expectations of a shareholder in Jack’s position under
circumstances including a history of no return on shareholder equity
during the several decades of the corporation’s existence.
Id. at 677. The court remanded with the following instructions:
The district court shall take whatever additional evidence is
required for the proper development of the record from which the
fair value of Jack’s equity interest may be determined. If, after
taking any additional evidence bearing on this question and
applying the reasonable expectation standard set forth above, the
district court finds BFI acted oppressively under the circumstances,
the court, sitting in equity, has considerable flexibility in resolving
the dispute.
Id. Additionally, the court stated, “We also note that if, instead, the district court
finds from the fully developed record evidencing the fair value of Jack’s equity
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interest that no oppression has been demonstrated by a preponderance of the
evidence, this action shall be dismissed.” Id. at 678.
On remand, the parties agreed the transcript from the hearing on March 1,
2011, would be part of the record in the second trial, held on March 18 and 19,
2014. Telford Lodden, a certified public accountant (CPA), testified concerning
the taxes the corporation would be required to pay if it liquidated. James Van
Werden, an attorney, also testified about the liquidated value of the corporation.
The district court found the fair value of Jack’s shares was the market
value of BFI’s assets, discounted for their liquidation value. The court
determined Jack did not have a reasonable expectation his shares could be
redeemed for a greater amount and his request to have BFI purchase his shares
for $1.8 million was unreasonable. The court also noted BFI did not have the
resources to pay Jack $1.8 million for his shares. The court concluded,
“Because his demands have exceeded the fair value of his equity interest, Jack
has failed to meet his burden to prove oppression by a preponderance of the
evidence.” Jack’s action for dissolution of the corporation was dismissed. Jack
appeals the decision of the district court.
II. Standard of Review
A claim of oppression by a minority shareholder is tried in equity and our
review is de novo. Id. “In equity cases, we are not bound by the district court’s
factual findings; however, we generally give them weight, especially with regard
to the credibility of witnesses.” Soults Farms, Inc. v. Schafer, 797 N.W.2d 92, 97
(Iowa 2011); see also Iowa R. App. P. 6.904(3)(g).
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III. Discussion
A. Jack claims the district court did not adequately follow the directive
of the Iowa Supreme Court in the previous appeal. The Iowa Supreme Court
stated the district court should determine “whether the last position taken by BFI
during negotiations on the price offered for Jack’s interest in the corporation was
outside the range of fair value and incompatible with the reasonable expectations
of a shareholder in Jack’s position.” Baur, 832 N.W.2d at 677. On August 7,
2007, Jack offered to sell his shares for $1.8 million. During the remanded
hearing, evidence was presented to show BFI did not respond to Jack’s offer
prior to the initiation of this lawsuit on October 7, 2007. Thus, BFI’s last position
was its failure to accept Jack’s offer to sell for $1.8 million. On this basis, we do
not consider the parties’ prior negotiations occurring from 1992 to 1997.
B. Jack claims the court improperly considered the corporate bylaws,
an amendment to the bylaws, and the expectations of other shareholders on the
issue of whether the fair value of his shares should be determined by their book
value. The supreme court noted, “As a minority shareholder, Jack also lacks
voting power to force the board of directors to set a book value that is reasonably
related to the fair value of the company’s assets.” See id. at 676. The book
value for the corporation’s assets was set in 1983 and did not reflect current
values.
While the district court engaged in a lengthy discussion of book value as
set by the corporate bylaws, as amended, the court did not ultimately determine
the fair value of Jack’s shares was their book value. The court stated, “The Court
holds that the fair value of Jack’s shares under the standard adopted by the
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supreme court does not exceed the amount of his proportionate share of the
market value of BFI’s assets, discounted to their liquidation value.” (Emphasis
added). The court also stated, “The fair value of Jack’s equity interest in BFI in
the record in this case cannot and does not exceed his proportionate share of
BFI’s liquidation value.” We conclude the district court did not find the fair value
of Jack’s shares was set by their corporate book value.2
Jack also claims the district court improperly considered the impact of
redemption on the other shareholders in determining his reasonable expectations
for his interest in the corporation. The Iowa Supreme Court stated, “We hold that
majority shareholders act oppressively when, having the corporate financial
resources to do so, they fail to satisfy the reasonable expectations of a minority
shareholder by paying no return on shareholder equity while declining the
minority shareholder’s repeated offers to sell shares for fair value.” Id. at 674
(emphasis added). Thus, whether a corporation has the financial resources to
purchase a minority shareholder’s shares is a legitimate consideration, and we
determine the district court properly considered this aspect of the case.
C. Jack states any offers to purchase his shares by BFI improperly
included a minority discount. The district court did not include a minority
discount. The court stated the fair value of Jack’s shares was the market value
of BFI’s assets, discounted to their liquidation value. The Iowa Supreme Court
stated, “We note, however, our recent disapproval of share valuations
2
The district court’s ruling is somewhat confusing in this regard, and includes
statements in the Findings of Fact that seem to support the corporation’s book value as
the value of Jack’s shares. In the Conclusions of Law, however, the court clearly states
the fair value of the shares is the fair market value of the corporation’s assets, taking into
consideration the full liquidation tax consequences.
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incorporating a discount for a minority interest in other corporations.” Id. at 669
n.5. We agree the fair value of Jack’s shares should not include a minority
discount.
D. Finally, Jack claims the district court improperly concluded a
liquidation discount should be applied to the value of his shares. The district
court stated:
The court cannot say that BFI’s insistence on a liquidation
tax discount, reduced to “present value,” was unreasonable. Both
Van Werden and CPA Lodden testified credibly that the use of a
liquidation tax discount is customary in such transactions. Jack
presented no contrary evidence. With BFI’s low tax basis on its
assets, a purchase of Jack’s interest would give BFI a substantial
built-in gain that would constitute a burden on the remaining
shareholders. No reliable basis existed for determining when the
remaining shareholders would be hit with the impact of that burden.
The illustration provided by Lodden regarding the impact of the
built-in gain is reasonable and persuasive.
Lodden’s testimony is particularly persuasive in light of the
relief requested by Jack in this lawsuit, consistent with his repeated
motions at the BFI board meetings for dissolution of the
corporation. If BFI was dissolved as Jack requested, the amount
available to BFI shareholders would be its net liquidation value.
Moreover, Jack has asked for an order of dissolution as one of the
remedies he seeks in this action. That is the ultimate statutory
remedy available on proof of oppression. The income taxes are
only one of the costs that would result from dissolution. Fair value
for Jack’s shares does not exceed a value that takes the full
liquidation tax consequences into consideration.
We agree with the district court’s conclusion the fair value of Jack’s shares
should take into consideration the taxes and other costs that would result from
liquidation of the corporation. See In re Marriage of Muelhaupt, 439 N.W.2d 656,
660 (Iowa 1989) (finding the value of a party’s shares of stock should be “subject
to a substantial discount because such an amount could be realized only upon
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liquidation of the company”). The testimony of Van Werden, an attorney, and
Lodden, a CPA, supports the application of a liquidation tax discount.
IV. Conclusion
The Iowa Supreme Court held “majority shareholders act oppressively
when, having the corporate financial resources to do so, they fail to satisfy the
reasonable expectations of a minority shareholder by paying no return on
shareholder equity while declining the minority shareholder’s repeated offers to
sell shares for fair value.” Baur, 832 N.W.2d at 674. The district court concluded
Jack’s offer to sell his shares for $1.8 million exceeded the fair value of his
interest in BFI and, therefore, the corporation’s failure to accept his offer did not
show oppression. We affirm the district court’s conclusion.
AFFIRMED.