No. 88-627
IN THE SUPREME COURT OF THE STATE OF MONTANA
DOUGLAS E. DANIELS,
Plaintiff and Respondent,
THOMAS, DEAN & HOSKINS, INC.,
a corporation, THOMAS and DEAN
PROPERTIES, INC., a corporation,
T.H. THOMAS, an individual and
as President and Director,
Defendants and Appellants.
APPEAL FROM: District Court of the Eighth Judicial District,
In and for the County of Cascade,
The Honorable Joel G. Roth, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
William Conklin, Conklin, Nybo and LeVeque, P.C.,
Great Falls, Montana
For Respondent:
Joe Bottomly, Bottomly Law offices, Great Falls,
Montana
Monte Beck, Beck Law Offices, Bozeman, Montana
Submitted: March 22, 1990
Decided: December 2 1 , 1990
Filed: L
Justice Diane G. Barz delivered the Opinion of the Court.
The District Court of the Eighth Judicial District, Cascade
County, Judge Joel G. Roth presiding without a jury, concluded that
Daniels, a minority shareholder in T & D Properties, was entitled
to $53,128 for his shares in T & D Properties. The District Court
based this conclusion on breach of fiduciary duty, oppressive
negotiation tactics, constructive fraud, and the presence of a
contract between Daniels and Thomas in which Thomas allegedly
promised to pay Daniels fair market value for his shares in T & D
Properties. The court then granted Daniels his costs in this
matter, which included his costs of hiring an appraiser. The
court, however, did not find a contractual or statutory right which
would allow Daniels to recover his attorney's fees. Defendants
appeal. We reverse.
The following issues are raised on appeal:
1. Whether the filing of Danielst motion for substitution of
judge divested Judge Roth of the power to render a judgment on this
matter.
2. Whether the District Court erred in ruling that a contract
existed which required T & D Properties to purchase Danielst shares
in T & D Properties.
3. Whether the District Court erred in ruling that Daniels
was entitled under Montana law to have his shares in T & D
Properties appraised and purchased.
4. Whether the pleadings fairly apprised the defendants of
the nature of the claims against them.
5. Whether the judgment rendered by the District Court
properly lies against all three defendants, TD & HI a corporation,
T.H. Thomas, an individual, and T & D Properties, a corporation.
6. Whether the District Court erred in awarding Daniels his
appraisal fees.
7. Whether the restrictive covenant in the TD & H buy-sell
agreement is void under 5 28-2-703, MCA.
On cross-appeal, Daniels raises the following issue:
Whether the District Court erred by not awarding Daniels his
attorney's fees.
Thomas, Dean & Hoskins, Inc. (TD & H) , a defendant, is an
engineering firm founded in 1965. TD & H's principal place of
business is in Great Falls with branch offices in Kalispell and
Bozeman. Thomas & Dean Properties, Inc. (T & D Properties), also
a defendant in this lawsuit, is a separate corporation from TD & H.
T & D Properties was formed in 1970 for the purpose of developing
real estate and for the purpose of holding real and personal
property. This property is then leased to TD & H. T & D
Properties has never paid dividends, but instead pays "management
fees1' to TD & H. These fees are then generally distributed as
bonuses to TD & H's employees and shareholders. T.H. Thomas,
another defendant, is the president and a director of both TD & H
and T & D Properties and also a major shareholder in both of these
corporations.
Douglas E. Daniels, the plaintiff, is a civil engineer who
began working for TD & H in 1969. In 1976, Daniels began
purchasing stock in TD & H. TD & H employees who purchased stock
in TD & H were also initially expected to purchase an identical
proportion of stocks in T & D Properties, however, the TD & H
shareholder agreement that was signed in 1979 abolished this
requirement. The shareholder agreement also contained a buy-sell
agreement for TD & H stock upon the voluntary or involuntary
termination from TD & H. The agreement established a formula price
for the purchase of the TD & H stocks, a time period in which they
will be paid, and a restrictive covenant. No buy-sell agreement
was established for the T & D Properties stock.
In 1985, Daniels was living in Bozeman and managing TD & H's
branch office in Bozeman. Upon Dean's retirement from TD & H in
1986, Thomas requested that Daniels move to Great Falls to manage
the Great Falls office. Daniels had just built a home in Bozeman
and therefore requested that alternatives to his moving to Great
Falls be considered. In mid-February 1986, Thomas and Daniels met
to discuss possible alternatives. The parties agreed to a three-
month trial period beginning February 18, 1986, whereby Daniels
lived in Bozeman and commuted to Great Falls.
On April 16, 1986, two months after the three-month trial
period began, Thomas and Daniels met again at Thomas1 request to
review the situation. The meeting did not go well. Daniels then
suggested that they discuss a termination agreement and Thomas
agreed to prepare a proposed termination agreement.
The termination agreement was drafted by an attorney for
TD & H and mailed to Daniels on April 18, 1986. Besides providing
for the termination of Daniels1 employment with TD & H, the
termination agreement also provided for the purchase of Daniels'
T & D Properties stock. A disagreement arose over the valuation
of Daniels' T & D Properties stock. Daniels therefore did not sign
the agreement. On May 13, 1986, Daniels and Thomas met and
attempted to negotiate the value of the T & D Properties stock, but
without success.
On September 17, 1986, in response to a letter written by
Daniels, Thomas offered to settle the dispute through negotiations
with Jack Holland, an employee of TD & H. On September 24, 1986,
Daniels was advised that Jack Holland had been authorized by each
corporation to settle Daniels1 claims against the corporations with
Daniels separately. Holland met with Daniels for two days in
September but the negotiations were unsuccessful.
The relationship between Daniels and Thomas continued to
deteriorate and on March 27, 1987, Daniels filed a complaint in the
District Court of the Eighth Judicial District, Cascade County,
alleging bad faith and wrongful termination against TD & H and
fraud, breach of fiduciary duty, undue influence, and negligent
misrepresentation against Thomas and both corporations. Along with
the complaint, Daniels filed a motion for substitution of judge.
The case was never transferred to another judge. Just prior to the
trial, on June 10, 1988, Judge Roth brought the parties1 attention
to the motion. At that time, the parties1 attorneys stipulated
that Judge Roth may sit as trial judge in the case.
This case was bifurcated into two separate actions over
vigorous objection by defendants. The action involving legal
claims of wrongful termination and breach of good faith and fair
dealing in an employment situation was postponed until a later date
for a jury. The action in equity involving whether Daniels was
entitled to an appraisal remedy in regard to his T & D Properties
stock was then tried without a jury on July 6, 7 and 8, 1988. The
trial was recessed until August 15, 1988 when testimony was
completed. Earlier, on July 5, 1988, the District Court had
granted Daniels' motion for partial summary judgment, ordering that
the restrictive covenant found in the 1979 shareholder agreement
was an unreasonable burden on the employee and ordered the
provision void under 5 28-2-703, MCA.
The District Court rendered its judgment on September 14,
1988, concluding that T & D Properties entered into an enforceable
contract to pay Daniels, a minority shareholder, for his T & D
Properties stock; that Thomas, as president of both TD & H and
T & D Properties violated his fiduciary duty by inducing Daniels
to leave his employment and by his adversarial negotiation stance;
that Daniels, as a minority shareholder, demonstrated an equitable
right to have his stocks in T & D Properties appraised and
purchased by T & D Properties because of Thomas1 oppressive
negotiation tactics; and that Thomas1 attempts to gain an unfair
advantage over Daniels amounted to constructive fraud under Montana
law. The court then concluded that the valuation method used by
T & D Properties was unfair and therefore adopted the net asset
approach as a reasonable method for determining the value of the
corporate stock owned by a minority shareholder. The court ordered
that under this method Daniels' T & D Properties stocks were worth
$53,128. The court also concluded that Daniels was entitled to his
costs in this matter, which included his cost of hiring an
appraiser. The court, however, also concluded that no contractual
or statutory right existed for ~anielsto recover his attorney's
fees from the defendants. Defendants appeal, and plaintiff cross-
appeals, raising the following issues.
The first issue this Court will address on appeal is whether
the filing of Danielsv motion for substitution of judge divested
Judge Roth of the power to render a judgment on this matter.
Defendants cite 5 3-1-804, MCA (1987), to argue that Danielsv
filing of the motion for substitution of judge divested Judge Roth
of the power to decide the case. This statute states in pertinent
part that:
After a timely motion has been filed, the
substituted judge shall have no power to act
on the merits of the cause and shall call in
another judge.
Section 3-1-804 (1)(a), MCA (1987). However, Daniels motion for
substitution of judge was filed on March 27, 1987. The law in
effect on that date provided in pertinent part that:
A motion for substitution of a judge
shall be made by filing a written motion for
substitution reading as follows:
"The undersigned hereby moves for
substitution of another judge for Judge
in this cause.If The clerk of court shall
immediately give notice thereof to all parties
and to the judge named in the motion. Upon
filing this notice, the judge named in the
motion shall have no further power to act in
the cause other than to call in another judge,
which he shall do forthwith, and to set the
calendar.
Section 3-1-802, MCA (1985). The record indicates that the clerk
of court did not give notice to either the judge or the opposing
parties nor was a notice of this substitution filed as required by
5 3-1-802, MCA (1985). Because the requirements of the 1985
statute were not followed,.JudgeRoth retained jurisdiction of the
case.
We also note, however, that contrary to what Daniels attempts
to assert, a judge could not obtain jurisdiction through the
consent of the parties in this case. See, e.g., Corban v. Corban
(1972), 161 Mont. 93, 96, 504 P.2d 985, 987; In re Woodside-
Florence Irrigation Dist. (1948), 121 Mont. 346, 352, 194 P.2d 241,
244. The parties' stipulation was therefore not effective in
allowing Judge Roth to retain jurisdiction of the case. If the
motion was filed only three months later, the pertinent law in
effect would have been the 1987 statute, and Judge Roth would not
have retained jurisdiction.of the case. However, in light of the
unique set of facts in this case Judge Roth did retain
jurisdiction.
The second issue raised on appeal is whether the District
Court erred in ruling that a contract existed which required T &
D Properties to purchase Daniels1 shares in T & D Properties.
In spite of the absence of a written agreement, the District
Court concluded that T & D Properties entered into an enforceable
contract to pay Daniels for his stock in T & D Properties. The
court stated that Thomas1 testimony at trial indicated that he
promised to pay fair market value for Daniels1 stock. The
testimony the District Court apparently relied upon to find a
contract between Daniels and Thomas stated that:
Q: (By Mr. Lynch) What promise was made to
him about purchasing the stock at the fair
market value?
A: We said that we would be willing to
negotiate that separate from T, D & H to
negotiate a reasonable settlement and that we
would be willing to prepare--pay fair market
value, and with that the way it had to be an
agreement that was made that he was willing to
take it, and we made no suarantee we would
reach an asreement with him or pay him
whatever [he] wanted. (Emphasis added.)
The District Court also justified its position by stating that this
Court indicated that the district courts are to look beyond the
statutory criteria and I1into the equities of the situationl1
(citing Maddox v. Norman (1983), 206 Mont. 1, 11, 669 P.2d 230,
All contracts must contain four essential elements. These
elements are: (1) identifiable parties capable of contracting, (2)
the partiesf consent, (3) a lawful object, and (4) consideration.
Section 28-2-102, MCA; Modern Machinery v. Flathead County (1982),
202 Mont. 140, 144, 656 P.2d 206, 209. In the present case, the
purported contract fails for a lack of consent. To have consent,
there must both offer and acceptance that offer.
Modern Machinery, 202 Mont. at 144, 656 P.2d at 209. Thomas1
testimony that the District Court apparently relied upon to
conclude that an agreement existed between Daniels and Thomas for
the purchase of Danielsf stock in T & D Properties was not
sufficient to establish that Thomas made an offer to Daniels for
the stock. In addition, no evidence exists that Daniels ever
accepted any offer that was purportedly made by Thomas.
The Restatement (Second) of Contracts, 9 24 defines an offer
as:
[tlhe manifestation of willingness to enter
into a bargain, so made as to justify another
person in understanding that his assent to
that bargain is invited and will conclude it.
In the present case, Thomast testimony does not rise to the level
of an offer. Although Thomas did testify that he would be willing
to pay fair market value for Danielsv stock in T & D Properties,
Thomas also clearly stated that "we would be willing to negotiate
. . . a reasonable settlement" and that "we made no guarantee we
would reach an agreement with him or pay him whatever [he] wanted."
Thomas1 testimony on which the District Court relied upon is
merely evidence of the negotiations that occurred between Thomas
and Daniels and not an offer made by Thomas. The District Court
had previously recognized that no agreement existed when it denied
defendants1 motion for directed verdict, stating that It[t]here was
a promise made to pay fair market value of the T & D [Properties]
stock and the parties have been negotiating but have never reached
an agreement and they are at a definite impasse.It In addition, the
District Court's reliance upon Maddox to justify ignoring the
statutory criteria and to look into the equities of the situation
is not appropriate under these set of facts. As this Court has
previously stated I1[e]quity can enforce provisions of contracts but
it cannot supply them. l1 Myhre v. Myhre (1976), 170 Mont. 410, 424,
554 P.2d 276, 283. Thomasv testimony does not contain language
that rises to an offer and therefore equity cannot be relied upon
to create an offer.
The third issue that will be addressed on appeal is whether
the District Court erred in ruling that Daniels was entitled under
Montana law to have his stock in T & D Properties appraised and
purchased.
T & D Properties is a closely held corporation but has not
elected to become a statutory close corporation under the Montana
Close Corporation Act, 5 35-9-101 et seq., MCA. Therefore,
Danielsf claims are governed by the provisions of the Montana
Business Corporation Act, 5 35-1-101 et seq., MCA. The District
Court concluded that Daniels was entitled to $53,128 for his three
and one-half shares of T & D Properties. The court based its
conclusion on findings of a breach of a fiduciary duty, oppression
of a minority shareholder and constructive fraud. In light of
these findings, the District Court apparently concluded that under
5 5 35-1-810, 35-1-921, MCA, and case law that it was empowered to
appraise the stock of a minority shareholder and order T & D
Properties to purchase Daniels1 stock in T & D Properties for the
sum of $53,128.
The proceedings in the District Court were of a broad
equitable nature. Furthermore, many issues raised on appeal are
mixed questions of law and fact. This Court's duty upon review of
equity cases and proceedings of an equitable nature is to review
all questions of fact arising upon the evidence presented in the
record, whether the evidence is alleged to be insufficient or not,
and to determine the same, as well as questions of law. Section
3-2-204(5), MCA. "There is in that statutory requirement for our
appellate review a measure of protection for the losing party
coming to us on appeal, at least in equity cases such as this."
Sawyer-Adecor Intll, Inc. v. Anglin (1982), 198 Mont. 440, 447,
646 P.2d 1194, 1198. We recognize that Rule 52(a), M.R.Civ.P.
requires findings of fact made by the district court to be upheld
unless they are clearly erroneous and that Rule 52(a) does not make
any distinction between cases of an equitable nature and cases at
law. However, this Court has stated that we will review both
questions of law and questions of fact but will not reverse the
trial court in an equity case on questions of fact unless there is
a decided preponderance of the evidence against those findings.
Sawyer-Adecor, 646 P.2d at 1199; Boz-Lew Builders v. Smith (1977),
174 Mont. 448, 452, 571 P.2d 389, 391. After reviewing the record
we hold there is a preponderance of the evidence in the record
against the findings the District Court.
A. Dissenter's Riqhts
The District Court found that one of the bases of Daniels1
right to an appraisal was a corporate resolution to pay Daniels for
his shares, thus, triggering the following provision:
Any shareholder of a corporation shall have the right to
dissent from and to obtain payment for his shares in the
event of any of the following corporate actions:
(e) any other corporate action taken pursuant to a
shareholder vote with respect to which the . . .
resolution of the board of directors directs that
dissenting shareholders have a right to obtain payment
of their shares.
Section 35-1-810(1)(e), MCA.
The District Court's ruling is unsupported by the evidence
presented. No such corporate resolution was entered into the
record. Thomas testified that he was authorized to offer up to
$35,000 for Daniels1 stock, but there was no testimony that Thomas
was directed to purchase the stock. Exhibit 19c is a stockholder
letter dated September 24, 1986, authorizing Jack Holland, an
employee of TD & H I to settle any and all claims against T & D
Properties. It is not a board resolution directing purchase of
Daniels ' stock. Moreover, the requirements of 5 35-1-810 (e), MCA,
were not satisfied. This section clearly contemplates corporate
action pursuant to a shareholder vote from which a shareholder
dissents, followed by a resolution of the board of directors
directing that such dissenter has a right to withdraw his
investment and obtain payment for his shares. That is not what
occurred in this case.
B. Fiduciary Duty
In the present case, Thomas' actions do not rise--either
statutorily or in equity--to the level in which a court should
interfere with a close corporation's business affairs. In its
conclusions of law, the District Court first found that Thomas had
breached his fiduciary duty to Daniels. In particular, the court
found that Thomas: (1) induced Daniels to leave his employment; (2)
represented that Daniels would receive 100% of his TD & H stock and
"fair value1'for his T & D Properties stock; (3) failed to disclose
material facts relating to his interpretation of the fair market
value of the T & D Properties stock; (4) attempted Ifto forcet1
Daniels to accept an unfair price for the T & D Properties stock
in order for Daniels to receive full value for the TD & H stock;
( 5 ) took an adversarial negotiation stance; (6) did not fully
disclose the value of the stock when considering his highest offer
of $25,000 and the court's subsequent valuation of the stock at
$53,128; (7) refused to share the cost of an independent appraiser;
(8) refused to take the suggestions by Daniels for a resolution for
the dispute; and (9) attempted to use his accountant's analysis of
some property in an unfair manner.
In finding that Thomas breached his fiduciary duty to Daniels,
a minority shareholder, the District Court primarily relied upon
this Court's decisions in Skierka v. Skierka Bros., Inc. (1981),
192 Mont. 505, 629 P.2d 214; Deist v. Wachholz (1984), 208 Mont.
207, 678 P.2d 188; and Dunfee v. Baskin-Robbins (1986), 221 Mont.
447, 720 P.2d 1148. In each of these three cases, fiduciary
duties were addressed. However, the relationship between the
parties in those cases are substantially different fromthe present
case, and therefore the court's reliance on them for defining
Thomas1 fiduciary duty was not appropriate.
In Deist, this Court determined that the unique relationship
between a bank's agent and a customer created a fiduciary duty
running from the agent to the customer. Deist, 208 Mont. at 219-
20, 678 P.2d at 194-95. This Court in Dunfee determined that it
did not have to decide whether the special facts and circumstances
of that case gave rise to a fiduciary duty. Dunfee, 221 Mont. at
452, 720 P.2d at 1151. Neither of these two cases addressed the
unique relationship between shareholders of a close corporation.
While the facts of Skierka involved shareholders of a close
corporation, the relationship between the shareholders in Skierka
consisted of special circumstances that are not necessarily found
between all shareholders of a close corporation. The trust
relationship between the shareholders that this Court focused on
in Skierka was that of an executor's trusteeship over the assets
of the decedent 's estate for the benefit of the devisees. Skierka,
192 Mont. at 513, 629 P.2d at 218. This Court therefore relied
completely on the trustee's statutes--§§ 72-20-201 through -211,
MCA (1979). These statutes are not applicable when the
relationship between the two close corporation's shareholders does
not involve an executor of an estate and the beneficiaries.
This Court has previously noted that the relationship between
close corporations closely approximates the relationship between
partners. Fox v. 7L Bar Ranch (1982), 198 Mont. 201, 212-13, 645
P.2d 929, 935. This Court, however, has never elaborated on the
fiduciary duty between shareholders in a close corporation when no
other type of relationship between the shareholders existed. The
Supreme Judicial Court of Massachusetts in Donahue v. Rodd
Electrotype Co. of New England, Inc. (Mass. 1975), 328 N.E.2d 505,
has addressed the fiduciary duty in such a relationship. In
Donahue, the Massachusetts court held that shareholders in a close
corporation have a duty to act in the I1utmost good faith and
loyaltyw to one another. Donahue, 328 N.E.2d at 515-17. The
Massachusetts court further stated that "[tlhey may not act out of
avarice, expediency or se1.f-interest in derogation of their duty
of loyalty to the other stockholders and to the cor~oration."
-
(Emphasis added.) Donahue, 328 N.E.2d at 515. See also, Solomon
v. Atlantis Development, Inc. (Vt. 1986), 516 A.2d 132; Jones v.
H.F. Ahmanson & Co. (Cal. 1969), 460 P.2d 464; Fix v. Fix Material
Co., Inc. (Mo. Ct. App. 1976), 538 S.W.2d 351; Baker v. Commercial
Body Builders, Inc. (Or. 1973), 507 P.2d 387.
The Massachusetts court subsequently refined this duty in
Wilkes v. Springside Nursing Home, Inc. (Mass. 1976), 353 N.E.2d
657. In Wilkes, the court acknowledged that the controlling group
in a close corporation have certain rights to what has been termed
"selfish ownershipI1 in the. corporation which need to be balanced
against their fiduciary obligation to minority stockholders and
stated:
Therefore, when minority stockholders in a close
corporation bring suit against the majority alleging a
breach of the strict good faith duty owed to them by the
majority, we must carefully analyze the action taken by
the controlling stockholders in the individual case. It
must be asked whether the controlling group can
demonstrate a legitimate business purpose for its action.
. .
. In asking this question, we acknowledge the fact
that the controlling group in a close corporation must
have some room to maneuver in establishing the business
policy of the corporation. ...If called on to settle
a dispute, our courts must weigh the legitimate business
purpose, if any, against the practicability of a less
harmful alternative. (Citations omitted.)
Wilkes, 353 N.E.2d at 663.
We determine that the reasoning of the Massachusetts court is
persuasive and also hold that the fiduciary duty between
stockholders of a close corporation is one of the "utmost good
faith and loyalty." However, the controlling group should not be
stymied by a minority stockholder's grievances if the controlling
group can demonstrate a legitimate business purpose and the
minority stockholder cannot demonstrate a less harmful alternative.
The facts of the present case, as set forth above in the
District Court's findings, do not exhibit a breach of the fiduciary
duty by Thomas to the shareholders of T & D Properties. The
evidence demonstrates that there were five shareholders in T & D
Properties. Besides Daniels, who had three and one-half shares,
the other shareholders are listed as Duanne C. Dean, with eighteen
and one-half shares, Marilyn P. Thomas with eighteen and one-half
shares, Sandra K. Cummings, with three and one-half shares, and
Dorothy E. Lorang, who held three shares. Duanne Dean, Marilyn
Thomas and Sandra Cummings received their shares from their
husbands, Wayne Dean, T.H. Thomas and James ~ummings,
respectively.
Dorothy Lorang, the TD & H office manager, held her T & D
properties stock in her own name. Daniels initially had his three
and one-half shares in his.wifelsname, but received it back in a
dissolution settlement in 1980. Although Thomas1 wife held his
eighteen and one-half shares of T & D Properties, neither party
disputes Thomas1 real interest in T & D Properties. Rather, Thomas
testified that he controlled the eighteen and one-half shares of
the forty-seven shares of T & D Properties, or approximately
thirty-nine percent. We therefore determine that Thomas was a
majority shareholder in T & D Properties for the purpose of this
appeal. To hold otherwise would ignore the realities of the
situation in this close corporation and rely merely upon
technicalities.
When negotiating for the purchase of Daniels1 shares of T & D
Properties, Thomas1 fiduciary duty of the I1utmost good faith and
loyaltyI1 was to all of the shareholders of T & D Properties, not
just to Daniels. And as the evidence demonstrates, Daniels was not
the only minority shareholder, Lorang and Cummings were also
minority shareholders. When applying the balancing test, we hold
that Thomas successfully demonstrated that his duty to these other
shareholders was not to pay Daniels a price for Daniels1 three and
one-half shares that the corporation could not afford so as not to
harm the other shareholders or the corporation. Daniels, however,
failed to demonstrate the practicability of a less harmful
alternative, he merely insisted that the corporation buy his shares
at the price he named. This Court is not in a position to make a
corporationls business decision when the controlling group can
demonstrate a legitimate business purpose for its decision and the
minority shareholder cannot demonstrate the practicability of a
less harmful alternative. Additionally, the evidence demonstrates
that Thomas offered to step aside and let Jack Holland handle the
negotiations with Daniels, thereby eliminating any potential
conflict of interest or undue influence.
Thomas was also a director of T & D Properties, therefore
Thomasf actions must also be measured by the ffbusinessjudgment
rule.If In Ski Roundtop, Inc. v. Hall (1983), 202 Mont. 260, 658
P.2d 1071, this Court adopted the business judgment rule. This
Court recognized that when a reasonable basis exists to indicate
that the directors of a corporation acted in good faith, the
directors are immunized from liability for honest errors. Ski
Roundtop, Inc., 202 Mont. at 273, 658 P.2d at 1078. Daniels failed
to offer proof that Thomas' actions were unreasonable in that they
would not have been taken by "'an ordinarily prudent man . . . in
the management of his own affairs of like magnitude and
importance.fffAlaska Plastics, Inc. v. Coppock (Alaska 1980), 621
P.2d 270, 278 (quoting Nanfito v. Tekseed Hybrid Co. (D. Neb.
1972), 341 F.Supp. 240, 244). Judges are not business experts and
therefore should not substitute their judgment for the judgment of
the directors. Alaska Plastics, Inc., 621 P.2d at 278. We hold
that Thomas acted prudently and in accordance with the business
judgment rule.
C. Oppression
The District Court also found that it had the power in equity
to liquidate the corporation's assets or require the purchase of
a minority shareholderlsshares for fair market value whenever the
acts of those that control the corporationlsactions are illegal,
oppressive or fraudulent (citing 5 35-1-921, MCA; Maddox, 206 Mont.
1, 669 P.2d 230; and Skierka, 192 Mont. 505, 629 P.2d 214). The
District Court then found that Thomas1 negotiation tactics with
Daniels were oppressive to Daniels. In particular, the District
Court found that Thomas1 actions were oppressive when he (1)
attempted to force Daniels to accept his valuation of stock in
T & D Properties by tying Daniels1 acceptance of the T & D
Properties stock to the TD & H shareholder agreement; (2) refused
to waive the anti-competition clause unless Daniels would accept
Thomas1 $20,458 offer for his T & D Properties stock; (3) used his
position as president of TD & H to influence the negotiations with
Daniels and T & D Properties; and (4) mentioned to Daniels in the
May 13, 1986 meeting that if Daniels did not sell his stock in
T & D Properties that TD & H could, in effect, bleed the assets
from T & D Properties. The court therefore determined that Thomas
used unfair negotiation tactics and that he unfairly used his
positions with TD & H and T & D Properties to influence the
negotiations with Daniels. The court found these actions by Thomas
were oppressive and rose to the level in which the court could
require T & D Properties to purchase Daniels1 three and one-half
shares.
This Court has held that oppression may be more easily found
in a close corporation than a larger, public corporation because
shares in a closely held corporation are not offered for public
sale. Fox, 198 Mont. at 209, 645 P.2d at 933; Skierka, 192 Mont.
19
at 519, 619 P.2d at 221. We have also held that when addressing
these type of cases, we will proceed on a case-by-case basis. Fox,
198 Mont. at 210, 645 P.2d at 933; Skierka, 192 Mont. at 519, 629
P.2d at 221. While the District Court correctly cited 5 35-1-921,
MCA, as the statute that allows a court to dissolve a corporation
upon a showing of oppression, we hold, as discussed below, that
Thomas' actions did not rise to the level that would allow a court
to take the drastic remedy of dissolution or to require a close
corporation to purchase a minority shareholder's stock.
A review of the other Montana decisions addressing closely
held corporations and oppressive behavior by the controlling
shareholders is helpful. In Skierka, the finding of oppression was
based on the exclusion of the minority shareholder from
participation in the operation of the corporation. Skierka, 192
Mont. at 518, 629 P.2d at 221. In Fox, we upheld the district
court which found that the controlling shareholders' conduct
revealed a calculated and oppressive plan designed to deprive the
minority shareholder of his rightful portion of the corporate
holdings and profits by making sure he did not have access to them.
Fox, 198 Mont. at 210, 645 P.2d at 933. The district court in Fox
further found that the minority shareholder had been effectively
deprived of any voice in management. Fox, 198 Mont. at 210, 645
P.2d at 934. This Court then held that these actions by the
controlling shareholders violated the minority shareholder's
reasonable expectations of realizing monetary remuneration and of
having a voice in management. Fox, 198 Mont. at 210, 645 P.2d at
934. On the other hand, the district court in Maddox found that
although the controlling shareholders' conduct Itwasnot per forma
as to corporate law or the corporation's by-laws, 'its informality
was not oppressive toward the plaintiff, nor was she defrauded."'
Maddox, 206 Mont. at 9, 669 P.2d at 234. This Court therefore
affirmed the district court's conclusion in Maddox of denying
liquidation. Maddox, 206 Mont at 13, 669 P.2d at 236.
In the present case, Thomas' actions were more consistent with
negotiation tactics than oppressive actions. Merely because Thomas
attached conditions to his offer does not necessarily mean that his
actions were oppressive. Additionally, the District Court's
finding that Thomas attempted to force Daniels to accept a
settlement by tying in the TD & H shareholder agreement completely
ignores the evidence that Thomas stepped aside in the negotiations
and Jack Holland took over and attempted to settle the claims
against the corporations separately. The court's finding that
Thomas made a statement in which he threatened to bleed the assets
from T & D Properties also does not rise to the level of oppressive
conduct that would warrant the ordering of T & D Properties to buy
Daniels1 shares. Possible future oppressive actions are not
sufficient to invoke § 35-1-921, MCA. On the other hand, if Thomas
were to carry through with his threats, Daniels may then have had
a legitimate cause of action in which he could allege that Thomas
was engaging in oppressive actions against him as a minority
shareholder. However, the mere possibility of oppression is not
sufficient to warrant the remedy the District Court ordered here.
In addition, Thomas offered Daniels up to $25,000 for his
shares in T & D Properties. Although Thomas also seemingly
21
attached other conditions to this offer, Daniels did not have to
accept the offer. In fact, Daniels rejected all of Thomas' offers.
The Supreme Court of Alaska addressed a similar situation in Alaska
Plastics, Inc. v. Coppock (Alaska 1980), 621 P.2d 270. Alaska
Plastics, Inc. involved the rights of a minority shareholder in a
close corporation. In particular, the minority shareholder, Muir,
held one-sixth of the Alaska Plastics, Inc. shares. The
controlling shareholders consistently failed to inform Muir of
shareholder meetings or informed her only a few hours before the
meetings. In 1971 and 1972, the controlling group also traveled
to Seattle for a shareholder's meeting and brought their spouses
at the company's expense even though there was no business purpose
for doing so. The controlling shareholders also voted themselves
each an annual $3,000 director fee, however they never paid
dividends. Coincidentally, Muir was the only shareholder who was
not a director. Muir never received any money from the
corporation. In May, 1974, the controlling shareholders offered
Muir $15,000 for her shares in Alaska Plastics, Inc. Muir rejected
and subsequently hired an accountant to investigate the company's
books. The accountant estimated the value of Muir's stock between
$23,000 and $40,000. In 1975, Muir offered her stock to the
corporation for $40,000. The board subsequently offered her
$20,000 which she again rejected. Muir then filed a complaint.
In its findings of fact and conclusions of law, the district
court concluded that:
[Tlhe continued retention by Plaintiff [Muir]
of one-sixth of the shares in Alaska Plastics,
Inc. . . .was oppressive to Plaintiff and
... an appropriate remedy would be to direct
the transfer of Plaintiff Is shares to Alaska
Plastics, Inc. in exchange for a fair and
equitable value. ... 11
Alaska Plastics, Inc., 621 P.2d at 273. The court then ordered the
corporation to purchase ~uirlsshares for $32,000. The Alaska
Supreme Court rejected the lower courtls conclusion that once the
corporation made an offer to Muir it was under an obligation to
purchase her stock at a "fairM price, regardless of the price the
corporation had initially offered. Alaska Plastics, Inc., 621 P.2d
at 276.
Likewise, merely because T & D Properties had made an offer
for Daniels1 stock and merely because Thomas testified that they
were willing to pay fair market value if they could agree to the
terms, does not obligate the corporation to purchase Daniels1 T & D
Properties stock. The record also demonstrates that the minority
shareholder, Lorang, had also wanted to sell her shares in T & D
Properties to the corporation, but the corporation did not have the
funds to purchase them. Daniels1 insistence that the corporation
should nonetheless purchase his shares in T & D Properties merely
because of possible future oppression by the controlling
shareholders is not persuasive. Furthermore, we agree with the
court in Alaska Plastics, Inc. in which it stated that:
We are not aware of any authority which would
allow a court to order specific performance on
the basis of an unaccepted offer, particularly
on terms totally different from those offered.
Such a rule would place a court in the
impossible position of making and enforcing
contracts between unwilling parties.
Alaska Plastics, Inc., 621 P.2d at 276.
We hold that Thomast actions were not so oppressive as to
warrant the appraisal remedy ordered by the District Court.
D. Constructive Fraud
The District Court concluded Thomasv attempts to gain an
unfair advantage over Daniels constituted constructive fraud under
§ 28-2-406, MCA. Section 28-2-406, MCA, provides that:
Constructive fraud consists in:
(1) any breach of duty which, without an
actually fraudulent intent, gains an advantage
to the person in fault or anyone claiming
under him by misleading another to his
prejudice or to the prejudice of anyone
claiming under him; . . .
As already determined above, Thomas did not breach his fiduciary
duty to Daniels. In addition, Thomas did not mislead Daniels to
his prejudice. Thomasv actions were not misleading but merely
negotiation tactics. Daniels rejected all of Thomas' offers, and
then failed to prove how he was thus prejudiced.
We hold that the District Court erred in granting Daniels an
appraisal remedy under 5 35-1-921, MCA.
In light of our above holdings in this case, this Court does
not need to address the following three issues raised on appeal:
(1) whether the pleadings fairly apprised the defendants of the
nature of the claims against them; (2) whether the judgment
rendered by the District Court lies against all three defendants
(TD & H, T.H. Thomas and T & D Properties); and (3) whether the
District Court erred in awarding Danielst appraisal fees.
The last issue raised on appeal is whether the restrictive
covenant clause in the TD & H buy-sell agreement is void under
§ 28-2-703, MCA.
The District Court found that as a matter of law, the
restrictive covenant found in the buy-sell agreement at paragraph
seventeen was void pursuant to 28-2-703, MCA. Paragraph
seventeen of the Agreement states that:
Inasmuch as a shareholder has access to
confidential information concerning the
corporate business, it is mutually agreed that
the compensation for a terminated shareholder
who obtains employment with a competitive firm
or enters any form of business in competition
with the corporation shall be paid for his
stock at the rate of seventy-five percent
(75%) of the fair value.
We disagree with the District Court on this issue.
Section 28-2-703, MCA, states that "Contracts in restraint of
trade [are] generally void. contract by which anyone is
restrained from exercising a lawful profession, trade, or business
of any kind, otherwise than is provided for by 28-2-704 or 28-2-
705, is to that extent void." (Emphasis added.) The two
exceptions allow parties to agree that upon either the sale of
goodwill of a business or the dissolution of a partnership, one or
more of the parties will refrain from carrying on a similar
business within a narrow designated area. Sections 28-2-704 and
-705, MCA.
The contract in this case is a share purchase agreement. This
Court has applied § 28-2-703, MCA, to both employment contracts and
to a lease which prohibited a competing full service restaurant
within the same building. See, State Medical Oxygen and Supply,
Inc. v. American Medical Oxygen Co. (1989), 240 Mont. 70, 782 P.2d
1272; Dobbins, DeGuire & Tucker v. Rutherford, MacDonald & Olson
(1985), 218 Mont. 392, 708 P.2d 577; OINeillv. Ferraro (1979), 182
Mont. 214, 596 P.2d 197. Since 5 28-2-703, MCA, applies to anv
contract, the statute would also apply to a share purchase
agreement. However, under certain factual circumstances a covenant
restraining a lawful profession, trade or business of any kind may
be acceptable if it passes a three part test of reasonableness.
Under this test, a covenant not to compete is reasonable if it is:
(1) limited in operation either as to time or place; (2) based upon
some good consideration; and (3) affords reasonable protection for
and not impose an unreasonable burden upon the employer, the
employee, or the public. State Medical Oxygen and Supply, Inc.,
240 Mont. at 74, 782 P.2d at 1275; Dobbins, 218 Mont. at 396-97,
708 P.2d at 580.
Defendants in this case assert that the agreement does not
violate 5 28-2-703, MCA, and therefore they have the burden of
showing that the agreement does not violate the statute. State
Medical Oxygen and Supply, Inc., 240 Mont. at 74, 782 P.2d at 1275;
First American Ins. Agency v. Gould (1983), 203 Mont. 217, 223,
661 P.2d 451, 454. Defendants did not assert nor prove that the
sale of goodwill of a business or the dissolution of a partnership
occurred. Therefore, neither of the statutory exceptions--§§ 28-
2-704 or -705, MCA--apply.
This Court must next apply the three part test to determine
whether the covenant is reasonable. The first essential criterion
that the defendants must demonstrate is that the covenant is
limited in operation either as to time or place. Defendants assert
that paragraph sixteen of the TD & H share purchase agreement
26
satisfies the time criterion. Paragraph sixteen states that:
A shareholder who voluntarily or
involuntarily terminates employment except for
purposes of retirement, death, or disability,
shall be paid for his shares at the fair value
at the time of termination on a pro rata basis
between the audits prior to and after
termination. Payment will be made one hundred
twenty (120) days after the audit following
date of termination, but in no case sooner
than two hundred forty (240) days after the
date of termination.
While paragraph seventeen specifies how much a terminated
shareholder will be paid under certain conditions, paragraph
sixteen specifies when the payment will be made. The agreement
must be read as a whole. Section 28-3-202, MCA; St. Paul Fire and
Marine Ins. Co. v. Cumiskey (1983), 204 Mont. 350, 363, 665 P.2d
223, 229. Upon reading the agreement, the restrictive covenant is
definitely limited as to time.
The second criterion that the defendants must demonstrate is
that the restrictive covenant is based upon some good
consideration. The consideration flowing to Daniels under this
covenant was his access to confidential information concerning the
corporate business. The corporation's consideration under this
covenant was requiring the corporation to pay only seventy-five
percent (75%) of the fair market value of the shareholder's stock.
Defendants therefore demonstrated that the restrictive covenant was
based upon some good consideration.
The third and last criterion that the defendants must
demonstrate is that the covenant affords reasonable protection for
and not impose an unreasbnable burden upon the employer, the
employee, or the public. The covenant affords the corporation
reasonable protection by deterring, but not prohibiting,
competition with them for a period not to exceed two hundred forty
(240) days. Deterring competition for this amount of time or
requiring the terminated shareholder to take only seventy-five
percent (75%) of the stock's fair market value does not impose an
unreasonable burden on the corporation, the terminated shareholder,
or the public.
On cross-appeal, Daniels raises the issue of whether the
District Court erred by not awarding Daniels his attorney's fees.
However, in light of our holdings in this case, we do not need to
address this issue.
Reversed and remanded for proceedings consistent with this
opinion.
We concur:
Justices
Justice John C. Sheehy, dissenting:
The majority opinion is completely out of focus with the case
which was tried in the Cascade County District Court, and on which
the District Court entered judgment.
For example, an essential element of the District Courtls
findings is that on April 16, 1986, at a meeting between Thomas,
as president of T & D Properties, and Daniels, Thomas agreed that
T & D Properties would purchase Daniels1 stock (3% shares) in T &
D Properties at fair market value. The majority opinion sets that
finding aside. The majority opinion relies in part portion
of Thomaslstestimony, without any reference to the other testimony
in the record which supports the District Court finding.
In setting aside the District Courtls finding that Thomas had
agreed to buy the T & D Properties stock from Daniels, no reference
mention is made by the majority opinion of a second finding made
by the District Court that on May 13, 1986, the parties met, and
asain asreed on the method to be used to determine the value of the
T & D Properties stock. The District Court found:
23. On May 13, 1986, Daniels and his accountant, Dan
Eigenman, met with Thomas and his accountants, Dale
Grabofsky and Curt Ammundson, at the offices of Hamilton
and Misfeldt in Great Falls. The only disagreement with
regard to the termination agreement was the value of the
T & D stock. The dispute centered around the value of
certain real property including the land known as Western
Properties and the Great Falls office building. There
was no major disagreement about the value of the other
assets of T & D. Both parties agreed to use the method
of determining the assets less liabilities, with a net
asset value to be divided by the total issued shares of
T & D and that figure multiplied by Daniels1 three and
4 shares.
On April 16, 1986 (the District Court stated the date to be
April 17, 1986) Thomas and Daniels met in Great Falls and there
entered into a mutual agreement for Daniels to terminate his
employment. In that meeting, they mutually concluded what would
happen with respect with the T D & H stock owned by Daniels, and
also the T & D Properties stock which he owned. The evidence with
respect to that conversation from Daniels is:
Q. Well, let's tell the court then what Mr. Thomas said
to you with regard to your leaving the employment.
A. Well, one of my concerns, you know, was that my
training and everything was in engineering, my education
and all my experience, and I mentioned, you know, how are
we going to resolve the issues, you know, that needed to
be resolved. And, Tom offered first of all, you know,
as far as T D & H stock, he would waive the clause that
requires I only get 75% of the stock. And, he said, you
know, you have been a good employee for a long time. We
have had a good relationship. He said we can close this
out, you know, we can get any information we need from
you on jobs that are ongoing. If you cooperate, you
know, and take care of those loose ends, we will waive
that clause.
Q. All right. What did he say?
A. We discussed very briefly the T & D Property, we also
touched on retirement plans. T & D Properties said we
will pay full fair market value for that. We will turn
the pension plans over to you whatever you wish to do.
I think we mentioned insurance that I would have an
option to pick that up on my own. (Emphasis added.)
The majority opinion recites that there was no offer and no
acceptance but the testimony is contrariwise. Mr. Thomas
testified:
Q. (By Mr. Lynch) Now, Mr. Daniels, you agreed to leave
an employment with the firm of Thomas, Dean & Hoskins,
did you not?
A. Based on the conditions that were discussed on the
16th of April. (Emphasis added.)
Following the April 16, 1986 meeting, Thomas met with his
attorney for the purpose of making up a formal written agreement
that related to that meeting. However in that agreement, instead
of providing for fair market value for the T & D Properties stock,
Thomas inserted a figure of $20,428. That had not been agreed upon
by the parties at the April 16 meeting. In connection with that,
Daniels testified:
Q. Did Mr. Thomas, before sending you this check, ever
consult with you or talk with you about the results of
the stock?
A. It was discussed on the 16th of April.
Q. And what was your impression at that time?
Q. That I would be paid a fair market value for the
stock.
The majority opinion to the contrary notwithstanding, there
was adequate, substantial and competent evidence to support the
findings of the District Court that agreement had been reached that
Daniels would receive fair market value for the T & D Properties
stock.
The ~istrict Court also determined that that agreement
included: I1Determining the fair market value of the T & D
Properties stock contemplated the use of an appraiser to value the
assets (real property) of T & D.I1 Thomas refused to get an
appraiser, to pay for an appraiser, and told Daniels that if an
appraiser was obtained, he would not regard it or rely on it. Thus
Thomas led Daniels to believe at the April 16 meeting that he would
receive fair value for his T & D Properties stock, as a part of the
termination agreement, but later refused to perform that part of
the agreement by any reference to a fair appraisal of what the
market value of the T & D stock should be.
When I say that the majority opinion is out of focus with the
case that was tried in ~istrictCourt, I mean that the opinion as
promulgated has no relation to the situation faced by the District
Court upon which it made a judgment. For that reason, I will
discuss what the District Court found, and the implications that
arise from the legal relationships that the court found.
Thomas, as president and director of T & D Properties, owed
Daniels, a minority stockholder, a fiduciary obligation. At all
times at trial, Thomas recognized he was a fiduciary. There was
no argument on that subject. Out of the fiduciary relationship,
the ~istrictCourt concluded that Thomas, as fiduciary, was bound
to act in the "highest good faith towards his beneficiary and not
to obtain any advantage therein over Daniels by the slightest
misrepresentation, concealment, threat or adverse pressure of any
kind." Skierka v. Skierka Brothers, Inc. (1981), 192 Mont. 505,
629 P.2d 214; Section 72-20-201, MCA (Repealed, 1989). The
fiduciary was bound not to have or acquire an interest which would
be adverse to the interests of his beneficiary without immediately
informing him of it and removing himself if requested. The
fiduciary had an affirmative duty to make sure that the beneficiary
retained a position of equity; and the fiduciary was obligated in
all transactions with his beneficiary to refrain from any unfair
persuasion for the purpose of obtaining an advantage over his
beneficiary.
The majority state that the trustee statutes are not
applicable to a fiduciary when a relationship between two close
corporation shareholders does not involve an executor of an estate
of the beneficiaries. That is entirely an incorrect statement of
law. When a fiduciary relationship exists, the laws applicable to
the fiduciary are those relating to constructive fraud. Bradbury
v. Nagelhus (1957), 132 Mont. 417, 319 P.2d 503. The statute
states that constructive fraud involves Ifanybreach of duty which,
without an actually fraudulent intent, gains an advantage to the
person at fault or anyone claiming under him by misleading another
to his prejudice. Section 28-2-406 (1), MCA. Thus, a constructive
trust arises under operation of law and is valid. Section 72-33-
208(3), MCA; B 72-33-220, MCA. When the majority state that the
fiduciary duty between stockholders of a close corporation is one
of the Ifutmostgood faith and loyaltyIf1 majority in reality are
the
stating the duties of a trustee in a constructive trust. There can
be no argument in this case that a fiduciary relationship exists
between Thomas, the corporation, and the minority shareholder. The
proposed findings of fact submitted by Thomas in this case accepted
the premise that Thomas was a fiduciary. No issue of any kind was
raised in the case that his status was any less than a fiduciary.
The parties agreed a fiduciary relationship existed.
When the majority then insert the Ifbusiness judgmentffrule,
they erroneously mix two incongruent concepts. The 'fbusiness
judgmentffrule applies to the acts of directors and officers to
hold them free from liability for honest errors, for mistakes of
judgment, when they act without corrupt motive and in good faith,
that is for mistakes that may properly be classified under the head
of honest mistakes. Ski Roundtop, Inc. v. Hall (1983), 202 Mont.
260, 658 P.2d 1071, 1078 (1983). The ttbusinessjudgmentt1rule
applies to officers and directors acting in a corporate capacity,
when no fiduciary relationship is involved. When a fiduciary
status is established, the actions of officers and directors are
examined, not under the Itbusinessjudgment rulef1
but rather whether
the fiduciary exercised the utmost good faith and loyalty, in this
case towards all of the shareholders of T & D Properties.
The majority resort to a "balancing test,It contending that
Thomas1 duty was to protect the other shareholders by not paying
Daniels a price for his shares that the corporation could not
afford so as not to harm the other shareholders of the corporation.
There is absolutely no proof of this in the record. In any event,
there could not be any such proof because a fair market value of
Danielst stock would likewise be a fair market value of all of the
other shareholders' stock. The majority talk about balance; it is
a see-saw, tipped on one end against Daniels.
Thomas breached the duties of a fiduciary. The court
concluded he had violated his duty by inducing Daniels to leave his
employment through representations that Daniels would be paid 100
percent of the value of his stock in the T D & H corporation, and
the "fair valueI1 of his stock for the T & D Properties corporation.
Thomas intended to force Daniels to accept an unfair price for his
T & D Properties stock in order for ~anielsto receive the full
value of the T D & H stock. (Thomas had written that the T D & H
stock anti-competition clause would be waived if Daniels would
accept Thomas1 valuation of the T & D properties stock.) Although
Thomas had authority from his board of directors to offer $35,000
for the T & D Properties stock to Daniels, he never transmitted
that offer to Daniels and adamantly stayed on the $25,000 figure.
Thomas stood to benefit from his dealings with Daniels, because he
owned 39 percent of the stock in T & D properties. For a fiduciary
to gain any advantage through breach of a duty constitutes
constructive fraud. Deist v. Wachholz (1984), 208 Mont. 207, 678
P.2d 188, 193; Ryckman v. Wildwood (1982), 197 Mont. 154, 641 P.2d
467, 472.
The District Court found that at the April 16, 1986 meeting,
Thomas had agreed to waive the anti-competition provision of the
share-purchase agreement that applied to the T D & H stock.
The District Court further found that Daniels, relying upon
the statements made by Thomas concerning the waiver, began an
engineering business in Belgrade on July 1, 1986. Thereafter
Thomas would not authorize a waiver of the anti-competition clause
unless Daniels agreed to accept the valuation of the T & D
Properties stock provided by Thomas. Indeed, by letter dated
September 17, 1986, Thomas informed Daniels that the full payment
of the value of Daniels1 T D & H stock was contingent on his
accepting Thomas1 value of Daniels' T & D Properties stock. From
all of the problems facing Daniels, the District Court found that
he was stranded in a closely-held situation which was hostile and
adverse to him as a minority shareholder. The District Court found
that T & D properties and Thomas agreed to pay fair market value
to Daniels for Daniels1 shares of stock in the corporation, but
that Thomas1 refusal until the time of trial to use an appraiser
or recognize one was oppressive and in violation of Thomas'
fiduciary duty. It was on that premise that the ~istrictCourt
found that the only remedy proper was to order the corporation to
purchase Daniels1 stock at fair market value. Such a purchase
would not result in any disruption of the corporate business nor
any injury to the public, and would promote the best interest of
T & D Properties.
The majority opinion intimates that neither the District Court
nor this Court can grant an equitable remedy to a minority
shareholder in a close corporation unless the minority shareholder
has asked for liquidation. That intimation is an unnecessary
extension of corporate law and has no basis in the case which the
majority cited in support. For example, in Maddox v. Norman
(1983), 206 Mont. 1, 669 P.2d 230, the minority shareholder
petitioned for liquidation, but the District Court found and this
Court agreed that the equities did not support his contention that
liquidation is a proper remedy. Instead, this Court stated that
the equitable powers of district courts in disputes among
shareholders of close corporations allowed the court to fashion
reasonable equitable remedies. This Court said:
Our prior decisions have recognizedthe general equitable
powers of district courts over disputes arising among
36
shareholders of close corporations (citing authority).
In ~histed,we recognized that power to choose from a
broad range of equitable remedies is necessary to resolve
disputes of this nature: "[bly [their] very nature,
intracorporate problems arising in a close corporation
demand the unusual and extraordinary remedies available
only in a court of equity1'147 Mont. 14, 409 P.2d at 820.
Accordingly, a court sitting in equity is empowered to
determine the questions involved in a case 'land do
complete justice.'' (Citing authority.) This includes
the power to fashion an equitable result. Rase v. Castle
Mountain Ranch, Inc. (1981), -Mont. , 631 P.2d 680,
687, 38 St.Rep. 992, 1000.
206 Mont. at 14, 669 P.2d at 237.
Thus the right of the minority shareholder to get equitable
relief from oppressive conduct by controlling shareholders is not
dependent on a request for liquidation, but whether equity is
necessary to fashion a just resolution. The view of this Court
expressed in Maddox, Skierka, and other cases, is in tune with the
Montana Close Corporation Act, adopted in 1987 ( 3 35-9-101 et
seq.). That Act provides, in 3 35-9-501, MCA, that a shareholder
in a statutory close corporation could petition the district court
for a corporate purchase of his shares if the directors who control
the corporation have acted in a manner that was "illegal,
oppressive, fraudulent, or unfairly prejudicial to the petitioner.
See Bahls and Quist, The ABA Model Statutory Close Corporation Act:
A New Opportunitv for "Made in Montana1I Corporations, Mont . Law
~eview,page 66, et seq.
I would therefore affirm the District Court's holding that
Daniels is entitled to have his shares purchased at fair market
value and that the fair market value is that found by the District
Court. I would make the judgment effective against T. H. Thomas
individually and T & D Properties, and not against the other
corporation, would find error in awarding Daniels
his appraisal fees. I would deny Daniels' cross-appeal for
attorneys fees.
Next comes the question of how Daniels ought to be paid for
his T D & H stock (a separate corporation). The majority opinion
finds that the restrictive agreement in the share-purchase
agreement adopted by T D & H does not violate the anti-competitive
provisions of Montana law. That portion of the majority opinion
is clearly wrong.
We repeat the pertinent provision of the shareholder
agreement:
Inasmuch as a shareholder has access to confidential
information concerning the corporate business, it is
mutually agreed that the compensation for a terminated
shareholder who obtains employment with a competitive
firm or enters any form of business in competition with
the corporation shall be paid for his stock at the rate
of 75% (seventy-five percent) of the fair value.
Under Montana law ( 5 28-2-703, MCA) any contract by which
anyone is restrained from exercising a lawful profession, trade or
business of any kind is to that extent void, subject to certain
exceptions not pertinent here. The provision above quoted of the
share-purchase agreement restrains Daniels from his lawful
profession as an engineer by penalizing him up to 25% of the value
of his T D & H stock. The District Court found that "there is no
limitation in the anti-competition provision therein as to the
duration of its prohibition or the territorial scope of his
prohibition. The provision, read literally, prohibits the
plaintiff from competing with the defendants anywhere in the world
and until the end of time." Clearly, the District Court understood
what it read in the provision.
The majority opinion contends that the anti-competition
provision is limited as to time because another provision of the
share-purchase agreement provides that payment for stock shall be
made to a shareholder 120 days after the audit following the date
of termination, but in no case sooner than 240 days after the date
of termination. Obviously, as the District Court found, that
provision relates to when payment is to be made and not to the
duration of the anti-competition provision. Two things militate
against the majority opinion's position: (1) At the time of the
trial, more than 240 days following the termination, Thomas was not
willing to waive the anti-competition petition provision, and pay
Daniels 100 percent of the value of his stock; and (2) if the
anti-competition provision is valid, as the majority opinion
contends, it could be specifically enforced even after payment for
the stock that had been made under the other provision of the
share-purchase agreement. We should declare the anti-competition
provision of the share-purchase agreement void. Dobbins, DeGuire
& Tucker v. Rutherford, MacDonald and Olson (1985), 218 Mont. 392,
708 P.2d 577; J T Miller Company v. Made1 (1978), 176 Mont. 49, 575
P.2d 1321.
At the outset, I stated that the majority opinion was out of
focus. The majority have set aside the District Court's findings
of fact without finding them clearly erroneous; and, they have
found valid a clearly anti-competitive provision of the share-
purchase agreement. On these points the majority have diverged
from rather than converged on previous decisions and statutory law,
and made vague and blurry for future cases the position of this
Court on these points.
Justice
I concur in the foregoing dissent of Justice John C. Sheehy.
Justice