The Iowa Supreme Court recently adopted a reasonableness standard for the adjudication of minority shareholder claims of oppression under the Iowa Business Corporations Act.1
If you are a majority shareholder or other control person of an Iowa corporation, you have lots of power but you cannot ignore the reasonable expectations of your minority shareholders. Those expectations may include a reasonable return on shareholder equity or the willingness to purchase minority shares for fair value.
Here is a very, very brief summary of the case. To get the full flavor, you should read the whole thing.
John (Jack) Baur inherited from his father shares of Baur Farms, Inc., a family farm corporation. Unfortunately for Jack, his interest was a minority interest which he held for nearly 50 years without receiving a dividend. Jack received $5,000 per year for service as an officer and director until 1997. In 1997 he was removed as an officer and his annual compensation as a director was reduced to $250.
For a number of years Jack had wanted to sell his shares. The corporation bylaws provide that the share price to the corporation or other shareholder is to be “book value per share of the shareholders’ equity interest in the corporation as determined by the Board of Directors, for internal use only, as of the close of the most recent fiscal year.”2 Jack’s efforts during the last 20 years to negotiate the sale of his shares to the corporation or other shareholders were unsuccessful.
Jack sued, requesting dissolution and payment of the fair value of his interest. Jack’s suit was brought under provisions of the Iowa Business Corporations Act authorizing a district court to dissolve a corporation in response to a minority shareholder petition alleging oppressive actions by those in control.3 He lost at the district court level and ended up before the Iowa Supreme Court on appeal.
Jack argues that the corporation’s failure to provide him a return on his shares and its refusal to offer a price for the shares fairly approximating their true value constituted oppression. The Court reversed and remanded for further proceedings, instructing the trial count to apply a reasonableness standard for the adjudication of Jack’s claim.
In adopting the reasonableness standard, the court cited authorities: (i) linking oppression “to the frustration of the reasonable expectations of the corporation’s shareholders” and (ii) granting relief “when the effect of a majority shareholder’s conduct is to deprive a minority shareholder of any return on shareholder equity.”4
The Court considered the effect of the buyout formula contained in the corporation’s Bylaws, noting that the IBCA makes no express mention of the enforceability of contractual or other restrictions setting transfer prices or purchase price formulas.5 The Court cited a comment to the Model Business Corporation Act advising that courts applying the model act “should look to [the corporation’s formula establishing the transfer price] unless the court decides it would be unjust or inequitable to do so in light of the facts and circumstances of the particular case.”6
“Fair value” principles are a noticeble component of the Court’s decision. The Court notes that the general assembly, in adopting the IBCA, has codified a “fair value” principle as an alternative to other dissolution remedies.7 The Court read these statutory provisions as “extensions of the principle that every shareholder may reasonably expect to share proportionally in a corporation’s gains.” (emphasis supplied) “When this reasonable expectation is frustrated, a shareholder-oppression claim may arise.”8
Guidance is found in the following portion of the Court’s decision:
“The determination of whether the conduct of controlling directors and majority shareholders is oppressive under section 490.1430(2)(b) and supports a minority shareholder’s action for dissolution of a corporation must focus on whether the reasonable expectations of the minority shareholder have been frustrated under the circumstances. We need not catalogue here all the categories of conduct and circumstances that will constitute oppression frustrating the reasonable expectations of minority shareholders’ interests. We hold that majority shareholders act oppressively when, having the corporate financial resources to do so, they fail to satisfy the reasonable expectations of a minority shareholder by paying no return on shareholder equity while declining the minority shareholder’s repeated offers to sell shares for fair value.”