The question often arises whether a minority shareholder can require the majority to buy his interest in a privately held company. The answer, as a general matter, is that absent an agreement that provides for the purchase, the majority has no duty to buy or redeem the interest.
As with many general statements of the law, there are exceptional circumstances where the majority could be required to purchase the interest of a minority owner or be considered as having acted oppressively in failing to purchase when demanded by the minority.
The saga of the Baur v. Baur Farms, Inc. is one of those exceptional situations. By way of background, two cousins inherited interests in farms in Iowa. The farms were held in a corporation, which over time accumulated what appears to have been significant retained earnings. One cousin, a minority holder, attempted over several years to be bought out. The stumbling block, not surprisingly, was the price.
An oppression case was filed by the minority, following the rejection of a demand to be bought out at $1.8 million. The trial court and appellate court found no oppression. The Iowa Supreme Court had a different view and defined “oppression” using a “reasonable expectations” standard. That is, if a corporation has the financial resources and fails to provide a return to shareholders and refuses to purchase the shares for fair value, the conduct may be found to have frustrated the reasonable expectations of the shareholders.
The case was remanded to the trial court to determine if the refusal of the corporation to purchase the shares was a rejection of a “fair value” offer as part of a determination if oppressive conduct occurred. On remand, the trial court determined that the demand by the plaintiff was for an amount that exceeded the “fair value” of the interest. Again, an appeal occurred. The Iowa Appellate Court held that the determination of the trial court as to the amount of the “fair value” was correct (value of the underlying assets less a discount for liquidation costs and gains taxes that would have been incurred). The refusal to purchase at a price in excess of fair value was, therefore, not “oppressive” under the circumstances. The Appellate Court also acknowledged the trial court’s consideration of the corporation’s ability to finance the purchase as part of its decision.
The above is a somewhat simplified summary of a dispute that went on for several years. What is important to note is the following:
- A general duty to buy out a minority does not exist absent a contractual arrangement
- A refusal to buy out a minority could create a situation a court would find “oppressive” and result in the majority being ordered to buy the minority at “fair value.”
- Understanding the concept of “oppression” and the meaning of “fair value” is critical. For instance, if the trial court had found the “fair value” to be in excess of the price set by the plaintiff, would “oppression” have been found and an order entered for the buyout at that court-determined amount?
- There is no substitute for thoughtful succession and liquidity planning.
Whether the new Administration and Congress eliminate or alter the current estate tax laws, planning is needed and requires clients to seek out the counsel of professionals who have backgrounds in these concepts.