Hansen v. 75 Ranch Co.

97-249

No. 97-249

IN THE SUPREME COURT OF THE STATE OF MONTANA

1998 MT 77

JENNIFER TULLY HANSEN and
FRANCES TULLY EISENMAN,

Plaintiffs and Appellants,

v.

75 RANCH COMPANY, a Montana
Corporation and PETER R. TULLY,

Defendants and Respondents.

APPEAL FROM: District Court of the Fourteenth Judicial District,
In and for the County of Musselshell,
The Honorable John C. McKeon, Judge presiding.

COUNSEL OF RECORD:

For Appellants:

Morris J. Braden (argued); Braden Law Firm, Billings,
Montana

For Respondents:

Richard F. Gallagher (argued); Church, Harris, Johnson &
Williams, Great Falls, Montana

Submitted: January 22, 1998

Decided: April 9, 1998
Filed:

__________________________________________

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (1 of 14)4/25/2007 4:33:06 PM
 97-249

Clerk
Justice W. William Leaphart delivered the Opinion of the Court.

¶1Jennifer Tully Hansen (Jennifer) and Frances Tully Eisenman (Frances)
(collectively Minority Shareholders) appeal from the decision of the
Fourteenth Judicial District Court, Musselshell County, determining that the
Minority Shareholders were equitably estopped from asserting dissenters'
rights pursuant to § 35-1-823, MCA, of the Montana Business Corporation
Act, that the 75 Ranch Company (Corporation) properly offered to purchase
the shares of the Minority Shareholders at a discounted rate, and that Peter
Tully (Peter or Majority Shareholder) did not breach his fiduciary duty or act
in an oppressive manner warranting relief to the Minority Shareholders
pursuant to §§ 35-9-501 to -504, MCA. We reverse and remand.
Background

¶2 Robert R. Tully (Robert) and Joan B. Tully (Joan), the parents of the
parties to this action, established a family ranch near Roundup, Montana
around 1961. All five of the Tullys' children worked on the ranch throughout
their childhood. In 1980, the Tullys incorporated the 75 Ranch Company as
a close corporation hoping to avoid estate and inheritance tax liability. In
addition, the Corporation executed a "Stockholders' Agreement" in November
1982 providing a method of transferring the shares of a deceased shareholder
and restricting the transfer of shares by shareholders during their lifetime.
Robert served as the President of the Corporation. Joan served as
Secretary/Treasurer. Robert and Joan together held 25,600 shares, a majority
of the stock. Each of the five Tully children held 2,880 shares.

¶3 The record indicates that between 1980 and 1986, the Corporation held
informal meetings at family gatherings over the Christmas holidays. Minutes
of the meetings were kept and indicate that there was never more than one
shareholder absent from a shareholder meeting. After finishing college, Peter
became more active in the ranch and served as Vice President on the Board of
Directors. In 1986, Joan Tully died and Peter's wife, Rhonda, succeeded her
as Secretary/Treasurer of the Corporation. Beginning in 1987, it appears that
the Corporation adhered to corporate formalities even less stringently,
continuing to hold its meetings when the family gathered for the holidays and
keeping family members apprised of corporate business over the telephone.

¶4 Robert passed away on June 10, 1989. Jennifer and Peter were
appointed as co-personal representatives of their father's estate. During
probate of Robert's estate, the shares were assigned a value of $12.26 per
share. Following the estate distribution, Peter owned 51 percent (20,400 of
40,000 shares) of the outstanding shares in the Corporation. Each of Peter's
siblings, including Jennifer and Frances, owned 12.25 percent (4,900 shares).
Peter took over as President and Rhonda remained the Secretary/Treasurer.

¶5 Peter and Rhonda lived on the ranch and tended to the day-to-day
operations of the Corporation. They continued the informal corporate
management practice. In approximately December 1989, the shareholders
discussed the possibility of selling the ranch due to difficulties arising with

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (2 of 14)4/25/2007 4:33:06 PM
 97-249

coal company developments in the area. The record indicates that at this time,
Jennifer and her sister Pat Oertli told Peter that since he was the one who lived
on the ranch and dealt with the operations, he and Rhonda should decide
whether to sell the ranch. However, Jennifer specified that in the event Peter
chose to relocate the ranch, she desired to sell her shares in the Corporation
since she had no interest in maintaining ownership in a ranch other than the
family homestead. At that time, Peter requested that Jennifer wait about a year
after the family ranch was sold or exchanged before requesting a buy out of
her shares.

¶6 Following the cancellation of certain grazing leases in 1992, Peter and
Rhonda started exploring options for disposition of the ranch. Peter retained
legal counsel to assist in an exchange of the Montana ranch for a New Mexico
ranch. In August 1992, Peter signed and executed an agreement to exchange
the properties. The agreement required that the transaction be structured as a
like-kind exchange under § 1031 of the Internal Revenue Code to avoid tax
consequences. The record reveals that the attorney retained by Peter was not
aware that other shareholders would be affected by the exchange and thus did
not advise Peter of the need to comply with the procedural notice requirements
of the Montana Business Corporation Act.

¶7 On December 31, 1992, Peter, in his capacity as President of the
Corporation, executed a Contract and Exchange Agreement for the disposition
of substantially all of the Montana property. The exchange was closed and
completed on January 29, 1993. The selling price of the Montana property
was $875,000. The purchase price of the New Mexico property was
$850,000. Peter did not provide the Minority Shareholders with notice of the
proposed exchange, and did not submit copies of the exchange documents or
other relevant information for shareholder approval. Peter, however, asserted
that he spoke with several of the Minority Shareholders during the process of
exchanging the properties and that during those conversations none of the
Minority Shareholders voiced opposition to the proposed exchange.

¶8 In April 1993, Peter received a letter from Jennifer reiterating her desire
to sell her shares in the Corporation. In response, Peter contacted the
corporate accountant to determine the value of the shares in compliance with
the Stockholders' Agreement. In May 1993, Jennifer requested that Peter
negotiate the purchase with her attorney. On June 1, 1993, Peter made an
initial offer of $14.63 per share. This offer was based on a balance sheet dated
November 30, 1992; however, a copy of the balance sheet was not provided
with the initial offer.

¶9 On October 15, 1993, Jennifer rejected Peter's initial offer and
requested a copy of the balance sheet. Upon receiving the balance sheet and
reviewing it for the first time, Jennifer realized that the share valuation applied
a 30 percent minority discount. Therefore, by letter dated December 8, 1993,
Jennifer sent a counteroffer of $20.90, representing the value of a share
without the discount. In addition, Jennifer's December 8th letter informed
Peter that Frances desired a buy out of her shares at the $20.90 valuation.
Peter testified that the December 8th letter was his first notice of dissenters'
rights. Not understanding the legal ramifications of dissenters' rights, Peter

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (3 of 14)4/25/2007 4:33:06 PM
 97-249

consulted an attorney and then responded with a compromise offer of $15.00
per share. The Minority Shareholders rejected Peter's compromise offer and
reasserted their offer of $20.90 per share. Unable to negotiate a resolution, the
Minority Shareholders filed suit on March 31, 1995.

¶10 At the District Court, the Minority Shareholders asserted the following
causes of action: violation of dissenting shareholders' rights, breach of
contract, breach of fiduciary duty, and right to an accounting and appraisal.
Peter answered by asserting that the Minority Shareholders consented to and
ratified the exchange, and thus were estopped from asserting dissenters' rights.
Following a bench trial, the District Court entered its Findings of Fact and
Conclusions of Law determining that the Minority Shareholders were
equitably estopped from asserting dissenters' rights, that the Corporation
properly offered to purchase the minority shares at a discounted rate and that
Peter did not breach fiduciary duties or act in an oppressive manner warranting
relief pursuant to §§ 35-9-501 to -504, MCA. The following issues are
presented on appeal:

¶11 1) Were the Minority Shareholders entitled to statutory notice of
dissenters' rights pursuant to 35-1-831, MCA?

¶12 2) Did the District Court err in concluding that the Minority
Shareholders were barred from asserting dissenters' rights pursuant to the
doctrines of waiver and equitable estoppel?

¶13 3) Did the District Court err in valuing the shares at "fair market value"
in accordance with the Stockholders' Agreement?

¶14 4) Did the District Court err in concluding that a minority discount
should be applied to the value of the shares?

¶15 5) Did the District Court err in adopting the valuation of the Majority
Shareholder's expert which included a tax discount?

¶16 6) Did the District Court err in concluding that Peter did not breach
fiduciary duties or act oppressively in his negotiations with the Minority
Shareholders?

¶17 7) Is either party entitled to recovery of attorney fees and costs?
We address issues 1 and 2, combine issues 3 and 4, address issue 5 and do not
reach issues 6 and 7.
Discussion

¶18 As a preliminary matter, Peter asserts that the Minority Shareholders'
§ 27-2-211(1), MCA. The Minority Shareholders argue that the three-year period in
§ 27-2-211(3), MCA, applies to this action. Peter argues that the Minority
Shareholders instigated this action seeking to assert rights, not recover a
penalty or forfeiture or enforce a liability as § 27-2-211(3), MCA,
contemplates. However, we determine that the provision Peter seeks to
invoke, § 27-2-211(1)(c), MCA, also contemplates an action upon a liability

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (4 of 14)4/25/2007 4:33:06 PM
 97-249

created by statute. The distinction between the two provisions is that
subsection (3) specifically applies to actions against directors or stockholders
of a corporation and allows a three-year period rather than the two-year period
Peter seeks to invoke.

¶19 The District Court determined that subsection (3) applied to the current
action because §§ 35-11-823 to -839, MCA (provisions addressing dissenters'
rights) impose obligations on a corporation and its board of directors in the
event of the sale or exchange of all or substantially all of the corporate assets.
In so concluding, the District Court applied a broad interpretation of "liability"
which includes an obligation created by law. We agree with the District
Court's broad interpretation of liability in analyzing § 27-2-211, MCA, and
determine that subsection (3), pertaining to directors and stockholders, applies
0to this case as the Minority Shareholders filed their complaint against Peter in
his capacity as the Majority Shareholder and President serving on the board of
directors. We affirm the District Court's finding that the sale/exchange
occurred on January 29, 1993 and that the Minority Shareholders were within
the applicable three-year statutory period of limitations when they filed suit on
March 31, 1995. We conclude that the Minority Shareholders' action is not
barred by the two-year statute of limitations imposed by § 27-2-211(1)(c),
MCA.
Standard of Review

¶20 The parties to this action seek to invoke this Court's equitable
jurisdiction. Section 3-2-204(5), MCA, in combination with Rule 52(a),
M.R.Civ. P., control this Court's standard for reviewing equitable cases and
require that findings of fact be upheld unless they are clearly erroneous.
McCann Ranch, Inc. v. Quigley-McCann (1996), 276 Mont. 205, 208, 915
P.2d 239, 241. However, we determine that the issues presented in this appeal
are legal in nature. Thus, we must review the District Court's conclusions of
law to determine whether the court's interpretation of the law is correct.
Carbon County v. Union Reserve Coal Co., Inc. (1995), 271 Mont. 459, 469,
898 P.2d 680, 686.
I

¶21 1) Were the Minority Shareholders entitled to statutory notice of
dissenters' rights pursuant to § 35-1-831, MCA?

¶22 Peter asserts that the Stockholders' Agreement should control the
Corporation's purchase of the Minority Shareholders' shares. In determining
the rights and duties of the parties, the District Court agreed with Peter and
applied the provisions of the Stockholders' Agreement. Section 35-9-301,
MCA, allows shareholders in a close corporation to enter agreements
determining their rights and obligations to each other and to the corporation.
In close corporations, such as 75 Ranch, shareholders' agreements restricting
the manner in which shareholders may dispose of their shares are quite
common. The Stockholders' Agreement in this case indicates that the
document was designed to restrict the transfer of shares by shareholders during
their lifetime, to provide for a procedure for the purchase of the shares of a
deceased shareholder and "generally to agree regarding the disposition of stock
of the Corporation on various contingencies." The provisions of the

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (5 of 14)4/25/2007 4:33:06 PM
 97-249

Stockholders' Agreement, however, do not contemplate an exchange
transaction such as occurred in this case, or any other "fundamental change"
in the corporate form (e.g., merger or share exchange) that would give rise to
dissenters' rights. Therefore, we determine that the Stockholders' Agreement
does not control the resolution of this litigation. Rather, the provisions of the
Montana Business Corporation Act apply.

¶23 The Montana Business Corporation Act was derived from the Model
Business Corporation Act and its provisions virtually mirror those of the
Model Act. The comments to the Model Act explain that the remedy provided
by dissenters' rights statutes enables shareholders who object to extraordinary
corporate transactions to dissent from the corporate action and to require the
corporation to buy their shares at fair value. 3 Model Bus. Corp. Act
Annotated § 13.01 at 13-8 (3d ed. 1995 Supp). The United States Supreme
Court explained in Voeller v. Neilston Warehouse Co. (1941), 311 U.S. 531,
535 n.6, 61 S.Ct. 376, 377 n.6, 85 L.Ed. 322, 326 n.6, that
[a]t common law, unanimous shareholder consent was a
prerequisite to fundamental changes in the corporation. This
made it possible for an arbitrary minority to establish a nuisance
value for its shares by refusal to co-operate. To meet the
situation, legislatures authorized the making of changes by
majority vote. This, however, opened the door to victimization
of the minority. To solve the dilemma, statutes permitting a
dissenting minority to recover the appraised value of its shares
were widely adopted.

More recent versions of this remedy allow a dissenting shareholder to "demand
that the corporation buy back his shares at fair value if the corporation takes
an action which fundamentally alters the character of the shareholder's
investment." Waters v. Double L, Inc. (Idaho App. 1987), 755 P.2d 1294,
1297 (citation omitted).

¶24 The Montana Business Corporation Act, at § 35-1-823, MCA,
addresses a corporation's selling, leasing, exchanging or otherwise disposing
of all or substantially all of its property otherwise than in the regular course of
business. However, for such a transaction to be authorized, the statute
requires that the board of directors shall first recommend the proposed
transaction to the shareholders, and the shareholders entitled to vote shall
approve the transaction. The corporation must notify the shareholders of the
proposed shareholder meeting and that the purpose of the meeting is to
consider the sale, lease, exchange or disposition of the property. The notice
should be accompanied by a description of the transaction. If a proposed
corporate action creating dissenters' rights is submitted to a vote at a
shareholders' meeting, the notice must also state that the shareholders are
entitled to assert dissenters' rights. Section 35-1-829, MCA. Furthermore,
35-1-827, MCA, provides that upon the consummation of a sale or exchange
of all or substantially all of the property of the corporation other than in the
usual course of business, a shareholder is entitled to dissent from the corporate
action and obtain payment of the fair value of the shareholder's shares.

¶25 Section 35-1-829(2) applies when a corporation takes an action creating

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (6 of 14)4/25/2007 4:33:06 PM
 97-249

dissenters' rights without a vote of the shareholders. In such a case, the
corporation must give written notification to all shareholders entitled to assert
dissenters' rights that the action was taken and must send them the dissenters'
notice no later than 10 days after the corporate action was taken. Subsection
(2) is an acknowledgment by the legislature that some corporate actions
resulting in a fundamental change need not be presented, or simply are not
presented, for a vote. 3 Model Bus. Corp. Act 13.20 Official Comment at
13-44, 45. The consequence of such fundamental change, however, is the
same as an action where a vote is taken in that shareholders may, after the fact,
assert dissenters' rights as a remedy.

¶26 The parties concede that Peter, acting as President of the Corporation,
exchanged substantially all of the property of the Corporation other than in the
ordinary course of business. This transaction gave rise to dissenters' rights
under the Montana Business Corporation Act. Peter, however, did not, in
compliance with § 35-1-823, MCA, notify each shareholder of the proposed
exchange or hold a shareholders' meeting to allow the shareholders to vote on
the proposed exchange. Most importantly, Peter did not, in compliance with
§§ 35-1-829 and -831, MCA, give the shareholders notice of dissenters' rights
before or within 10 days after the exchange.

¶27 In his defense, Peter asserts that in the course of negotiating the New
Mexico transaction he discussed the exchange with the Minority Shareholders
over the telephone. Peter asserts that the Minority Shareholders did not voice
opposition to the exchange. In addition, Peter testified that he believed that
since corporate matters had always been conducted informally, the usual
manner of conducting business would be sufficient for the exchange. Peter
asserts that even though the exchange was handled by the Corporation's
retained counsel, it was not until he received the December 8, 1993 letter
(nearly one year after the exchange) from the Minority Shareholders' counsel
that he was informed of dissenters' rights. Finally, Peter asserts that by
"acquiescing or consenting to, and participating in the informal operation of
75 Ranch for many years, the minority shareholders waived their rights to
strict enforcement of corporate statutory rights and requirements and it would
be inequitable to allow their strict assertion now."

¶28 The District Court agreed with Peter's acquiescence theory and
determined that the Minority Shareholders' failure to object during the
exchange transaction amounted to consent which equitably estopped them
from asserting dissenters' rights. The District Court held that "[a] shareholder
is not entitled to assert dissenting rights when he/she is in favor of the
transaction" (citing § 35-1-830(1)(b), MCA). Jennifer asserts, however, that
she informed Peter that in the event the family homestead was exchanged for
another ranch, she was not interested in remaining a shareholder. In addition,
the Minority Shareholders argue that the proposed exchange was never
presented for their vote at a shareholders' meeting; therefore, § 35-1-830(1)(b),
MCA, which bars dissenters' rights in the event a shareholder votes in favor
of the proposed corporate action, does not apply in this instance. Moreover,
because the Minority Shareholders were never given notice of their right to
dissent, they could not possibly have knowingly waived such rights.

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (7 of 14)4/25/2007 4:33:06 PM
 97-249

¶29 Section 35-1-830(1)(b), MCA, cited by the District Court as authority
barring the Minority Shareholders' right to notice of dissenters' rights, states
that "[i]f proposed corporate action creating dissenters' rights . . . is submitted
to a vote at a shareholders' meeting, a shareholder who wishes to assert
dissenters' rights . . . may not vote his shares in favor of the proposed action."
We determine, however, that if the action is never presented for a vote, as in
this case, § 35-1-830(1)(b) cannot be invoked to later bar minority
shareholders from asserting their rights. The Minority Shareholders were not
given an opportunity to vote regarding the exchange nor were they notified of
their right to dissent from the Corporate exchange; therefore, we determine
that the Minority Shareholders could not knowingly waive their right to assert
dissenters' rights in the manner contemplated by § 35-1-830, MCA. The
District Court's conclusion that § 35-1-830(1)(b), MCA, barred the Minority
Shareholders from asserting dissenters' rights, in light of their failure to
expressly object to Peter's actions, is incorrect as a matter of law. We
determine that the Minority Shareholders were entitled to statutory notice of
dissenters' rights pursuant to § 35-1-831, MCA.
II

¶30 2) Did the District Court err in concluding that the Minority
Shareholders were barred from asserting dissenters' rights pursuant to the
doctrines of waiver and equitable estoppel?

¶31 The District Court found that "[b]ecause of the disclosures and other
findings . . . the objection of Jennifer and Frances to the exchange, as asserted
in their exercise of dissenters' rights, is a fact which was either known by them
or which can necessarily be imputed to them to have existed prior to the
exchange." However, waiver is the voluntary, intentional relinquishment of
a known right, which will be declared only when the party clearly manifests
such an intention. McGregor v. Mommer (1986), 220 Mont. 98, 110, 714 P.2d
536, 543. The presence of voluntariness and the requisite intent are
necessarily questions of fact. McGregor, 714 P.2d at 544.

¶32 The District Court found that the Minority Shareholders knew of their
objection to the exchange and thus their failure to expressly object resulted in
waiver. We disagree. Before the exchange took place, Jennifer stated that she
did not want an interest in a ranch other than the family homestead. More
importantly, we determined above that the Minority Shareholders were entitled
to notice of the sale and of their right to dissent under the Montana Business
Corporation Act. In the absence of a notice of sale and right to dissent, it
cannot be said that the Minority Shareholders knowingly and voluntarily
waived their rights. Finally, the Minority Shareholders did not clearly
manifest an intent to waive their right to dissent. The District Court erred in
concluding that, as a result of their silence, the Minority Shareholders waived
their right to dissent.

¶33 In order to assert equitable estoppel as a defense, Peter must establish
the following essential elements:
(1) there must be conduct, acts, language, or silence amounting
to a representation or concealment of material facts; (2) these
facts must be known to the party estopped at the time of his

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (8 of 14)4/25/2007 4:33:06 PM
 97-249

conduct, or at least the circumstances must be such that
knowledge of them is necessarily imputed to him; (3) the truth
concerning these facts must be unknown to the other party
claiming the benefit of the estoppel at the time it was acted upon
by him; (4) the conduct must be done with the intention, or at
least with the expectation, that it will be acted upon by the other
party, or under the circumstances that it is both natural and
probable that it will be so acted upon; (5) the conduct must be
relied upon by the other party, and thus relying, he must be led
to act upon it, and (6) he must in fact act upon it in such manner
as to change his position for the worse.

Dagel v. City of Great Falls (1991), 250 Mont. 224, 234-35, 819 P.2d 186,
192-93. We have held that 26-1-601, MCA, must be considered when
analyzing equitable estoppel. Section 26-1-601 provides a list of conclusive
presumptions and includes:
(1) the truth of a declaration, act, or omission of a party, as
against that party in any litigation arising out of such
declaration, act, or omission, whenever he has, by such
declaration, act, or omission, intentionally led another to believe
a particular thing true and to act upon such belief[.]

We further explained in Dagel that " '[e]stoppel is a principle of equity . . .
equity will grant relief sought when in view of all the circumstances to deny
it would permit one of the parties to suffer a gross wrong at the hands of the
other party who brought about the condition . . . . Estoppel is not favored and
will only be sustained upon clear and convincing evidence . . . .' " Dagel, 819
P.2d at 193 (quoting Kenneth D. Collins Agency v. Hagerott (1984), 211
Mont. 303, 310, 684 P.2d 487, 490).

¶34 The District Court concluded that the conduct, acts, language and
silence of Jennifer and Frances amounted to representations of approval of the
exchange and concealment of objection. These representations of approval
rather than objection are a material fact. In completing the exchange, 75
Ranch and Peter relied upon the conduct, acts, language and silence of
Jennifer and Frances. Because of this reliance, their position has changed for
the worse. In short, the District Court concluded that the Minority
Shareholders, by failing to expressly object to the exchange by the
Corporation, waived their right to dissent and should be estopped from
asserting dissenters' rights.

¶35 However, we have held that "estoppel 'has no application where the
omissions of the party claiming estoppel brought about the problem.' "
McGregor, 714 P.2d at 544 (quoting Carroccia v. Todd (1980), 189 Mont.
172, 177-78, 615 P.2d 225, 228; First Sec. Bank of Bozeman v. Goddard
(1979), 181 Mont. 407, 593 P.2d 1040). We determine that Peter's failure to
provide the Minority Shareholders with notice of the proposed exchange and
an opportunity to dissent prevents Peter from claiming estoppel as it was his
omission that gave rise to Jennifer and Frances' silence. We hold that the
District Court erred in concluding that the Minority Shareholders were barred
from asserting dissenters' rights pursuant to the doctrines of waiver and

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (9 of 14)4/25/2007 4:33:07 PM
 97-249

equitable estoppel.
III

¶36 3) Did the District Court err in valuing the shares at "fair market value"
in accordance with the Stockholders' Agreement?

¶37 4) Did the District Court err in concluding that a minority discount
should be applied to the value of the shares?

¶38 The District Court, concluding that the rights, status, and legal
relationship of the parties is determined by contract, namely the Stockholders'
Agreement, held that the express written terms of the Stockholders' Agreement
set the purchase price for the shares at "fair market value." The court further
determined that, based on McCann Ranch and In re Marriage of Jorgenson
(1979), 180 Mont. 294, 590 P.2d 606, the application of a minority discount
is allowed when determining "fair market value" under a Stockholders'
Agreement. However, in McCann Ranch, the shareholder did not assert
dissenters' rights or institute proceedings to challenge McCann Ranch's failure
to notify her of dissenters' rights. The action was instituted by the corporation
solely for the purpose of establishing the value of her stock. McCann Ranch,
915 P.2d at 242. In addition, the district court in McCann Ranch found that
a minority discount was appropriate based on the methodology recommended
by the shareholder's expert. McCann Ranch, 915 P.2d at 243. Furthermore,
Marriage of Jorgenson is distinguishable in that this Court was presented with
the issue of fairness of a property distribution in a dissolution of marriage.
The minority discount in Marriage of Jorgenson was applied to the market
value of the shares in accordance with a shareholders' agreement, not as a
result of a transaction giving rise to dissenters' rights. Marriage of Jorgenson,
590 P.2d at 610.

¶39 The Minority Shareholders in this case requested relief pursuant to the
dissenters' rights provisions of the Montana Business Corporation Act.
Section 35-1-827(1)(c), MCA, states that "[a] shareholder is entitled to dissent
from and obtain payment of the fair value of the shareholder's shares in the
event of . . . consummation of a sale or exchange of all or substantially all of
the property of the corporation other than in the regular course of business .
. . ." Section 35-1-826(4), MCA, defines "fair value" with respect to
dissenters' shares as "the value of the shares immediately before the
effectuation of the corporate action to which the dissenter objects . . . ."
Because we have determined that the Montana Business Corporation Act
controls, we further conclude that the Minority Shareholders are entitled to
"fair value" in accordance with the statutes, rather than "fair market value" as
provided in the Stockholders' Agreement.

¶40 In McCann Ranch, we held that nothing in § 35-1-826(4), MCA,
prohibits consideration of a minority shareholder's lack of control and lack of
marketability for minority shares when establishing "fair value." McCann
Ranch, 915 P.2d at 242-43. We further reasoned that "[a] discount for a
minority interest is appropriate when the minority shareholder has no ability
to control salaries, dividends, profit distributions and day-to-day corporate
operations." McCann Ranch, 915 P.2d at 243 (citations omitted). However,

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (10 of 14)4/25/2007 4:33:07 PM
 97-249

the majority of courts addressing the issue of minority discounts has held that
discounts should not be taken when determining fair value of minority shares

sold to another shareholder or to the corporation. See John J. Oitzinger, Fair
Price and Fair Play Under the Montana Business Corporation Act, 58 Mont.
L. Rev. 407, 420 n.82 (1997). These courts clarify that discounts at the
shareholder level are inherently unfair to the minority shareholder who did not
pick the timing of the transaction and is not in the position of a willing seller.
Thus, these courts hold that a dissenting shareholder's position should be the
equivalent of what it would have been had the fundamental change not
occurred. Moreover, they reason that valuing the shares at less than their
proportionate share of the corporation's fair value produces a transfer of wealth
from the minority shareholder to the shareholders in control. Oitzinger, 58
Mont. L. Rev. 420-21 (citing In re McLoon Oil Co. (Me. 1989), 565 A.2d 997,
1005). We find the policies expressed by these courts compelling and therefore
overrule our decision in McCann Ranch to the extent that it holds that a
minority discount is appropriate when calculating "fair value" for the sale of
a minority shareholder's shares in a closely-held corporation to a majority
shareholder or to the corporation.

¶41 Applying a discount is inappropriate when the shareholder is selling her
shares to a majority shareholder or to the corporation. The sale differs from
a sale to a third party and, thus, different interests must be recognized. When
selling to a third party, the value of the shares is either the same as or less than
it was in the hands of the transferor because the third party gains no right to
control or manage the corporation. However, a sale to a majority shareholder
or to the corporation simply consolidates or increases the interests of those
already in control. Therefore, requiring the application of a minority discount
when selling to an "insider" would result in a windfall to the transferee. This
is particularly true since the transferring shareholder would expect that the
shares would have at least the same value in her hands as in the hands of the
transferee. See Steven C. Bahls, Resolving Shareholder Dissention: Selection
of the Appropriate Equitable Remedy, J. Corp. L. 285, 302 (Winter 1990). In
short, "a minority discount recognizes that controlling shares are worth more
in the market than are noncontrolling shares. . . ." Shear v. Gabovich (Mass.
App. Ct. 1997), 685 N.E.2d 1168, 1187 (citation omitted). Since there is no
"market" involved in an inside transfer of shares, the minority discount should
not be applied.

¶42 Moreover, we recognize that the dissenters' rights provisions of the
Model Business Corporation Act, as adopted by the Montana legislature, were
fashioned as a legislative remedy for minority shareholders who find their
interests threatened by significant corporate changes. See 3 Model Bus. Corp.
Act § 13.01 at 13-8 (discussing the historical background of dissenters' rights).
The dissenters' rights provisions protect the minority shareholders by allowing
them to obtain payment of fair value for their shares. Based on this policy,
many courts realize that applying discounts when valuing the shares of a
dissenting shareholder destroys the legislative intent to protect the minority
shareholder's right to dissent. MT Properties, Inc. v. CMC Real Estate Corp.
(Minn. App. 1992), 481 N.W.2d 383, 387 (noting that courts in Delaware,
Rhode Island, Iowa, Missouri, Maine, California, Colorado and Oregon are

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (11 of 14)4/25/2007 4:33:07 PM
 97-249

among those rejecting minority discounts for the reason that discounts defeat
legislation enacted to protect the minority's right to dissent); see also Charland
v. Country View Golf Club, Inc. (R.I. 1991), 588 A.2d 609; Christopher
Vaeth, Annotation, Propriety of Applying Minority Discount to Value of
Shares Purchased by Corporation or its Shareholders from Minority
Shareholders, 13 A.L.R. 5th 840 (1993).

¶43 We conclude that the Minority Shareholders are entitled to fair value
pursuant to § 35-1-827, MCA. Fair value means the value of the shares
immediately before the effectuation of the corporate action to which the
dissenter objects. Section 35-1-826(4), MCA. We further conclude that
application of a minority discount is inappropriate when minority shareholders
in a close corporation sell their shares to the corporation or majority
shareholders in a situation controlled by the dissenters' rights statute. We hold
that the District Court erred in concluding that a discount applied to the
minority shares. We remand to the District Court for a valuation of the shares'
fair value without the application of a minority discount.

¶44 Further, since we hold that the Montana Business Corporation Act
controls, we direct the District Court to reconsider the Minority Shareholders'
request for appointment of an appraiser pursuant to § 35-1-838, MCA. That
provision allows the District Court to appoint one or more appraisers to
receive evidence and recommend a decision on the question of fair value.
Section 35-1-838(4), MCA.
IV

¶45 5) Did the District Court err in adopting the valuation of the Majority
Shareholder's expert which included a tax discount?

¶46 As courts have noted, the determination of "fair value" is an "inexact
science" and its application has generated a large, disparate body of case law.
See Kaiser v. Kaiser (N.D. 1996), 555 N.W.2d 585, 587; Robblee v. Robblee
(Wash. 1992), 841 P.2d 1289. We note that most courts, in valuing the shares
of a dissenting shareholder based on fair value, recognize three approaches:
asset value, market value and earnings value. Asset value concentrates on the
real worth of the corporate assets and can be determined by valuing the
corporation upon a liquidation or by valuing the corporation as a going
concern. Market value refers to valuation of the shares on the basis of the
price for which a willing buyer would pay a willing seller. Earnings value
relates to the earning capacity of the corporation and is usually arrived at by
averaging earnings over a number of years. Brown v. Hedahl's-Q B & R, Inc.
(N.D. 1971), 185 N.W.2d 249; see generally Ferdinand S. Tinio, Annotation,
Valuation of Stock of Dissenting Stockholders in Case of Consolidation or
Merger of Corporation, Sale of its Assets, or the Like, 48 A.L.R. 3d 430 (1973
& Supp. 1997). On remand, we note that courts have discretion to consider a
number of factors including, but not limited to, the methods of valuation
explained above.

¶47 The District Court was presented with two experts regarding the value
of the Minority Shareholders' shares. The Minority Shareholders' expert,
Watts, appears to have advocated the earnings value method of valuation. On

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (12 of 14)4/25/2007 4:33:07 PM
 97-249

the other hand, Gilbert, expert for Peter and the Corporation, advocated the
liquidation method of assessing asset value. The District Court determined that
the evidence most credible in establishing "fair market value" was the
testimony of Gilbert. On appeal, Peter asserts that "[a] sale, as contemplated
under the asset approach, gives rise to a tax liability. . . ." However, courts
have noted that unless the corporation is undergoing an actual liquidation, the
liquidation method is not an appropriate method of valuing shares of a
dissenting shareholder. See Cede & Co. v. Technicolor, Inc. (Del. 1996), 684
A.2d 289 (failure to value the company as a going concern may result in an
understatement of fair value); Friedman v. Beway Realty Corp. (N.Y. 1995),
661 N.E.2d 972 (the fair value of a dissenter's shares is to be determined on
their worth in a going concern, not in liquidation); Rapid-American Corp. v.
Harris (Del. 1992), 603 A.2d 796 (it is axiomatic that in a statutory appraisal
proceeding, the dissenting shareholders are entitled to receive fair value
representing their proportionate interest in a going concern); Elk Yarn Mills
v. 514 Shares of Common Stock (Tenn. 1987), 742 S.W.2d 638 (holding that
the corporation is a going concern and the dissenting shareholders are entitled
to a valuation of their shares on that basis and noting that the overwhelming
weight of authority approves the valuation of the assets of the corporation as
a going concern). Specifically, the Supreme Court of Delaware has explained
that "the dissenter in an appraisal action is entitled to receive a proportionate
share of fair value in the going concern on the date of the [action giving rise
to dissenters' rights], rather than value that is determined on a liquidated
basis." Cede & Co., 684 A.2d at 298 (citations omitted).

¶48 On remand, the District Court must determine "fair value" as opposed
to "fair market value." In deciding whether to assess costs of the exchange or
apply a tax discount in the "fair value" analysis, the court must bear in mind
that "fair value," as explained above, means the value of the shares
immediately before the effectuation of the corporate action to which the
dissenter objects. Thus, if costs are incurred after effectuation of the
exchange, those costs should not be assessed against the dissenting
shareholders. Likewise, as to applying a tax discount, in cases arising under
appraisal statutes, courts have recognized that "ordinarily when dissenting
stock is accorded net asset value, that value is to be determined by considering
the corporation as a going concern and not as if it is undergoing liquidation."
Tinio, 48 A.L.R. 3d at 465.

¶49 Because we determine that the Minority Shareholders are entitled to
"fair value" pursuant to the dissenters' rights statute, we do not reach the issue
of whether the Majority Shareholder acted in an oppressive manner that
breached fiduciary duties which could entitle the Minority Shareholders to fair
value pursuant to §§ 35-9-501 and -503, MCA. In addition, we leave to the
District Court the determination of whether to assess court costs and attorney
fees pursuant to § 35-1-839, MCA. We reverse and remand to the District
Court for a determination of the "fair value" of the Minority Shareholders'
shares and other relevant matters in accordance with this opinion.

/S/ W. WILLIAM LEAPHART

We concur:

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (13 of 14)4/25/2007 4:33:07 PM
 97-249

/S/ J. A. TURNAGE
/S/ JAMES C. NELSON
/S/ KARLA M. GRAY
/S/ WILLIAM E. HUNT, SR.
/S/ JIM REGNIER
/S/ TERRY N. TRIEWEILER

file:///C|/Documents%20and%20Settings/cu1046/Desktop/opinions/97-249%20Opinion.htm (14 of 14)4/25/2007 4:33:07 PM