Filed 11/22/16
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
MARK GOLES et al., 2d Civil No. B268990
(Super. Ct. No. 56-2013-00446212-CU-
Plaintiffs and Appellants, MC-VTA)
(Ventura County)
v.
UDAY SAWHNEY et al.,
Defendants and Respondents.
Mark and Karen Goles appeal from an order
specifying $139,666.67 as the buyout value of their 36.7%
minority shareholder interest in Katana Software, Inc. (Katana)
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pursuant to Corporations Code section 2000, subd. (c). The
statutory buyout provision is a special proceeding. We construe
the order as an alternative decree which is appealable pursuant
to section 2000, subdivision (c). (Cotton v. Expo Power Systems,
Inc. (2009) 170 Cal.App.4th 1371, 1380, fn. 4.) Appellants
contend that the trial court undervalued their shares when it
“confirmed” three disparate court-ordered appraisals and
1
All statutory references are to the Corporations Code.
averaged the appraisals to determine the fair value of the
company. We reverse.
Procedural History
Katana, a closely held corporation, is a software
development company. As indicated, appellants owned 36.7
percent of the company. Respondent Robert F. Woodward owned
31.7 percent, and respondent Uday Sawhney owned 31.6 percent.
Appellants were founding shareholders and employed by Katana
in key positions. In 2013, appellants were terminated after they
solicited a company executive to take Katana‟s intellectual
property and client lists for a new start-up company.
Appellants sued for the involuntary dissolution of
Katana (§ 1800) and sought an accounting, injunctive relief,
damages for breach of fiduciary duty, and $60,000 due on a
promissory note. To avoid dissolution, respondents brought a
motion to appraise the fair value of the company and buy out
appellants‟ shareholder interest pursuant to section 2000.
Respondents requested a stay of the dissolution action and the
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causes of action for breach of fiduciary duty. The trial court
stayed the proceedings and appointed three disinterested
appraisers to ascertain the fair value of Katana and appellants‟
shares. The order stated: “There shall be no direct or indirect
2
The complaint includes personal actions for negligent
preparation of appellants‟ tax returns (sixth cause of action) and
$60,000 due on the promissory note obligation (seventh cause of
action). The trial court granted appellants‟ request to bifurcate
the sixth and seventh causes of action for trial. Respondents, in
their motion to stay the other causes of action, argued that the
breach of fiduciary duty claims (third, fourth, and fifth causes of
action) were not personal claims and should be stayed with the
dissolution action until the appraisals were completed.
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contact or communication between any appraiser, on the one
hand, and any party or their counsel, on the other hand, without
a showing of good cause and prior order of the Court.” The
appraisers were instructed to base the appraisals on the
company‟s “„liquidated value as of December 20, 2013 but taking
into account the possibility, if any, of the sale of the entire
business as a going concern in liquidation.‟”
Appraisers Carl L. Sheeler, Jason E. Forsyth, and
Burton H. Marcus submitted appraisal reports valuing
appellants‟ shares at $69,000, $150,000, and $200,000
respectively. Respondents requested a hearing to finalize the
valuation and shareholder buyout. Appellants questioned the
appraisals and requested that the trial court set a briefing
schedule. The trial court denied the request and found that the
fair value of appellants‟ interest in Katana “is $139,666.67, which
sum is calculated by averaging the three appraisal report
valuations together.”
Respondents tendered full payment. Appellants
deposited the funds in a trust account and appealed. The trial
court denied a motion to stay the judgment pending the appeal
and ordered appellants to deliver the Katana stock certificates to
respondents. They did so. (§ 2000, subd. (d).)
Shareholder Buyout
A section 2000 shareholder buyout is a special
proceeding that supplants an action for involuntary dissolution of
a corporation. (Go v. Pacific Health Services, Inc. (2009) 179
Cal.App.4th 522, 532.) Section 2000 provides that when a
shareholder sues for involuntary dissolution, the corporation, or
the holders of 50 percent or more of the voting power of the
corporation, may avoid the dissolution by purchasing for cash the
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shares owned by plaintiffs at their “fair value.” (§ 2000, subd.
(a).) The statute defines “fair value” as the “liquidation value as
of the valuation date but taking into account the possibility, if
any, of sale of the entire business as a going concern in a
liquidation.” (Ibid.) If the parties cannot agree on a valuation,
the trial court shall appoint three disinterested appraisers to
appraise the fair value of the shares. (§ 2000, subd. (c).) “The
order shall prescribe the time and manner of producing evidence,
if evidence is required. The award of the appraisers or of a
majority of them, when confirmed by the [trial] court, shall be
final and conclusive upon all parties.” (Ibid.)
Here the appraisers could not reach a consensus on
the fair value of the company or appellants‟ shares. The trial
court nonetheless “confirmed” the appraisal reports, averaged the
three appraisals, and found that the fair value of appellants‟
shareholder interest was $139,666.67.
Standard of Review
Appellants contend that the buyout order must be
reversed because the trial court‟s determination of the fair value
of appellants‟ shareholder interest was erroneous as a matter of
law. The factual aspects of the fair value determination are
reviewed under the substantial evidence standard. (Mart v.
Severson (2002) 95 Cal.App.4th 521, 530.) “However, the
superior court‟s interpretation of the statutory standard set forth
in section 2000 is subject to de novo review on appeal.
[Citations.]” (Ibid.; Cotton v. Expo Power Systems, Inc., supra,
170 Cal.App.4th at p. 1380.)
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Derivative Claims as a Fair Value Factor
Appellants‟ complaint includes derivative claims for
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breach of fiduciary duty. It alleges that respondents “looted” the
corporation by taking unauthorized loans, employed family
members, used corporate funds to pay personal expenses, and
purposefully neglected corporate governance. Paragraph 51 of
the third cause of action prays for $53,100 damages on behalf of
Katana based on an unauthorized loan of corporate funds. The
claim is re-alleged in the fourth and fifth causes of action for
breach of fiduciary duty by board members and controlling
shareholders.
“A derivative claim (or other claim that may yield a
potential recovery for the corporation) is a corporate asset that
must be considered when determining „fair value.‟” (Friedman et
al., Cal. Practice Guide: Corporations (The Rutter Group 2016)
¶ 8:873.6, p. 8-176; see Cotton v. Expo Power Systems, Inc.,
supra, 170 Cal.App.4th at p. 1380.) “If successful, a derivative
claim will accrue to the direct benefit of the corporation and not
to the stockholder who litigated it. [Citations.]” (Grosset v.
Wenaas (2008) 42 Cal.4th 1100, 1114.)
None of the derivative claims were considered by the
appraisers or the trial court in determining the fair value of
Katana. This was erroneous. (See Cotton v. Expo Power Systems,
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A single cause of action by a shareholder can give rise to
derivative claims, individual claims, or both. (Denevi v. LGCC,
LLC (2004) 121 Cal.App.4th 1211, 1222.) “The claims are
derivative where the injury alleged is one inflicted on the
corporate entity or on the „whole body of its stock.‟ [Citation.]”
(Ibid., citing Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93,
106.)
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Inc., supra, 170 Cal.App.4th at p. 1374; Kennedy v. Kennedy
(2015) 235 Cal.App.4th 1474, 1485 [dismissal of derivative claim
requires court approval].) Where a minority shareholder claims
that his shares were undervalued because of self-dealing and
misconduct by corporate directors and officers, he should be
afforded the opportunity to demonstrate that the alleged
misconduct in fact occurred. (See, e.g., Steinberg v. Amplica, Inc.
(1986) 42 Cal.3d 1198, 1208-1209 [fraud and breach of fiduciary
duty claims must be considered by appraiser in determining fair
value of dissenting shareholder‟s interest in corporate merger].)
“[A] determination of the fair value of the shares of a corporation
under section 2000 includes an assessment of the value, if any, of
pending derivative actions and their effect on the fair value of the
shares. The trial court‟s order in this case did not comply with
the provisions of section 2000, and therefore, must be reversed.”
(Cotton v. Expo Power Systems, Inc., supra, 170 Cal.App.4th at p.
1374.)
Discount for Lack of Control
The Marcus and Forsyth appraisals discounted the
fair value of appellants‟ shareholder interest by 20 percent and
15 percent for lack of control. Section 2000, however, does not
permit a lack-of-control discount when determining the fair value
of a minority shareholder interest. (Friedman et al., Cal. Practice
Guide: Corporations, supra, ¶ 8:876, p. 8-178; Ronald v. 4-C’s
Elec. Packaging (1985) 168 Cal.App.3d 290, 298.) “[T]he rule
justifying the devaluation of minority shares in closely held
corporations for their lack of control has little validity when the
shares are to be purchased by someone who is already in control
of the corporation. In such a situation, it can hardly be said that
the shares are worth less to the purchaser because they are
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noncontrolling. [Citation.]” (Brown v. Allied Corrugated Box Co.
(1979) 91 Cal.App.3d 477, 486.) The trial court erroneously did
not follow section 2000 because it averaged the three appraisals,
two of which used a lack-of-control discount to determine the fair
value of appellants‟ shareholder interest.
De Novo Determination of Fair Value
Respondents argue that the trial court was not bound
by the appraisals and was authorized to examine the matter de
novo and set the correct value. (See Friedman et al., Cal.
Practice Guide: Corporations, supra, ¶ 8:885, p. 8-179; Cotton v.
Expo Power Systems, Inc., supra, 170 Cal.App.4th at p. 1376;
Venables v. Credential Ins. Agency, Inc. (1956) 140 Cal.App.2d
724, 727 [trial court rejected unanimous appraisal report and
determined fair value de novo].) But that did not happen. The
trial court “confirmed” the appraisal reports “in their entirety”
and found that the fair value of appellants‟ interest in Katana is
calculated by averaging the three appraisal report valuations
together. There is no provision in the Corporations Code for this
averaging methodology.
Section 2000, subdivision (c) provides that “[t]he
award of the appraisers or of a majority of them, when confirmed
by the court, shall be final and conclusive upon all parties.”
(Italics added.) But such an award requires that at least two of
the appraisals reach a consensus on fair value. (See, e.g., Abrams
v. Abrams-Rubaloff & Associates, Inc. (1980) 114 Cal.App.3d 240,
248; Brown v. Allied Corrugated Box Co., supra, 91 Cal.App.3d at
pp. 489, 491.) Here, the trial court confirmed all three appraisal
reports even though there was no consensus. If the trial court
intended to determine fair value de novo, it could not do so by
“confirming” the appraisals and taking the mathematical average
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of defective appraisals that use a lack-of-control discount and do
not consider the derivative claims.
In Dickson v. Rehmke (2008) 164 Cal.App.4th 469,
defendant invoked the appraisal provisions of section 17351 to
buy out plaintiff‟s interest in a limited liability company. Section
17351, which is identical to section 2000, provided that the trial
court could appoint three appraisers and that the unanimous or
majority award of the appraisers would be final and conclusive on
all parties upon its confirmation by the court. (§ 17351, subd.
(b)(3).) Because the appraisals were $0, $56,000 and $286,000,
there was no award by a majority of the appraisers to confirm.
(Id., at p. 479, fn. 2.) The trial court took the mean value of the
three appraisals and found that the fair value was $147,333.33.
(Ibid.) The Court of Appeal dismissed the appeal as untimely
but, in dicta, stated that the trial court was “free to select among
conflicting appraisals or decide the matter de novo. [Citations.]”
(Id., at p. 475.) We need not, and do not, decide whether this
dictum is “good law.”
Unlike Dickson, the trial court could not select among
conflicting appraisals or decide the matter de novo unless 1. the
derivative claim was considered, and 2. the “lack of control”
discount was removed from consideration.
Respondents seek solace in the traditional appellate
rule that a trial court‟s unsound reasoning should not be utilized
to impeach its result if the result is correct. Phrased otherwise,
“[i]t is established that on appeal we review the decision of the
trial court rather than its reasoning, and thus „. . . a ruling or
decision correct in law will not be disturbed on appeal merely
because it was given for the wrong reason. If correct upon any
theory of law applicable to the case, the judgment will be
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sustained regardless of the considerations that moved the lower
court to its conclusion.‟” (Belair v. Riverside County Flood
Control Dist. (1988) 47 Cal.3d 550, 568.) We ourselves have
applied this rule. (Lewow v. Surfside III Condominium Owners
Assn., Inc. (2012) 203 Cal.App.4th 128, 129.) Based upon this
record, we cannot say that the result was correct.
Disposition
The judgment is reversed. On remand, the trial court
is ordered to obtain a majority fair value appraisal that takes into
account the derivative claims and does not use a lack-of-control
discount. In the alternative, the trial court may take evidence on
the derivative claims and make a de novo determination of the
fair value of appellants‟ shareholder interest, consistent with
section 2000. (Cotton v. Expo Power Systems, Inc., supra, 170
Cal.App.4th at p. 1383.) Appellants are awarded costs on appeal.
CERTIFIED FOR PUBLICATION.
YEGAN, Acting P. J.
We concur:
PERREN, J.
TANGEMAN, J.
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Vincent J. O‟Neill, Jr., Judge
Superior Court County of Ventura
______________________________
Ferguson Case Orr Paterson, John A. Hribar and
Wendy C. Lascher; Law Offices of Larry D. Webb, Larry D. Webb,
for Appellants.
Glaser Weil Fink Howard Avchen & Shapiro, Andrew
Baum, Elizabeth G. Chilton, for Respondents.