1. Corporations--closely-held--minority shareholders' rights--reasonable expectation analysis--
findings
The trial court in a minority shareholder's rights case did not disregard the reasonableness and without-
fault requirements of the reasonable expectations analysis where the bulk of the court's findings were geared to
other parts of the test in Meiselman v. Meiselman, 309 N.C. 279, but the court stated that the holders of 39% of
the ownership interest had certain reasonable expectations which were set out.
2. Corporations--closely-held--minority shareholders' rights--reasonable expectations--viewed over
entire course of dealing--not limited to written instruments
The trial court correctly found that a minority shareholder and director in a closely-held corporation had
reasonable financial and management expectations. A complaining shareholder's reasonable expectations cannot
be viewed in a vacuum, but must be examined and re-evaluated over the entire course of the various participants'
relationships and dealings and are not limited to those memorialized in written instruments.
3. Corporations--closely-held--minority shareholder's rights--reasonable expectations--frustration--
faulty conduct of shareholder--causal connection
The reasonable expectations of complaining shareholders in a closely-held corporation were frustrated
where the corporation refused to offer fair market value for the shares of one shareholder and systematically
excluded from all involvement one of the directors. Although the company contended that any frustration of
expectations came as a result of the shareholder's sexual harassment, there was no causal connection between the
faulty behavior and the frustration of the complaining shareholder's expectations and no causal connection
between the shareholder's conduct and the exclusion of the director from management decisions.
4. Corporations--closely-held--protection of expectations of minority shareholders--dissolution
The trial court did not err by ordering dissolution of a closely-held corporation where that was the only
way to safeguard the expectations of the complaining shareholders. The majority shareholders can prevent
dissolution if they opt to purchase the shares of the complaining shareholders at the fair value determined by an
independent appraiser.
5. Corporations--closely-held--costs of appraiser's report--wholly taxed to defendants--court's
discretion
The trial court did not abuse its discretion by taxing the entire cost of an independent appraiser's report
to defendants in an action brought by minority shareholders in a closely-held corporation. Although a pre-trial
case management order stated that appraisal costs would be shared by both parties, that order specifically stated
that the court could amend any of its provisions when appropriate.
LEWIS, Judge.
Since 1955, North Carolina has served as a pioneer and "shining light"
in the protection of minority shareholder rights. Robert Savage McLean,
Note, Minority Shareholders' Rights in the Close Corporation under the New
North Carolina Business Corporation Act, 68 N.C.L. Rev. 1109, 1125-26 (1990)
(citing a quote by Professor F. Hodge O'Neal that appeared in the Charlotte
Observer on May 20, 1989). In this appeal, we are asked to re-affirm that
tradition of protection by upholding the dissolution of a closely-held
corporation, nearly forty percent (40%) of whose shares have basically been
frozen by the controlling shareholders.
Defendant Piedmont Electric Repair Company ("PERCO") is a closely-held
corporation engaged in the business of electrical contracting work.
Defendant Robert G. Draughan ("Buck") is PERCO's president and owns fifty-one
percent (51%) of the company's shares. Defendant F.W. Short ("Short") is the
executive vice-president, treasurer, and owner of one share of PERCO stock.
A.G. Draughan ("Glenn"), father of Buck, owned thirty-eight percent (38%) of
PERCO's shares when he died in 1996. All his shares are currently in a
testamentary trust that he established for the benefit of his wife for life
and then his four daughters. Plaintiffs serve as trustees of this trust.
The third-party defendants own the remaining eleven percent (11%) of PERCO's
stock.
Glenn began working for PERCO in 1938 and gradually worked his way up
the management ranks within the company. During his tenure, he held
positions as vice-president, president, and chairman of the board of PERCO.
As of 1992, he, Buck, and Short were PERCO's three directors, as well as the
company's only stockholders. Beginning in 1992, however, Glenn's standing inthe company began to deteriorate when allegations of sexual ha
rassment were
lodged against him. PERCO hired independent counsel to investigate these
allegations. Counsel's report concluded that Glenn had committed various
acts of sexual harassment. Upon advice of counsel, PERCO thereafter banned
Glenn from the company's premises and limited his job duties to only that of
a "consultant" at the rate of $15,000 per year.
Upon learning of this, Glenn attempted to sell his shares of stock.
Just as Dan Short (Glenn's former partner and Short's father) had previously
done, Glenn wanted to sell his shares in order to fund his retirement. But
pursuant to a shareholder restriction agreement, the company and all other
shareholders had a right of first refusal on any attempted sale of stock.
Accordingly, Glenn offered to sell his shares to either PERCO, Buck, or Shortfor 120% of the company's book value. Buck and Short, both in
dividually and
on behalf of the company, turned down the offer.
At a 10 February 1994 shareholder's meeting, Buck and Short were re-
elected as PERCO directors; plaintiff James Royals, Jr. ("Royals"), Glenn's
grandson, was elected as the third director. However, at a directors'
meeting that afternoon, Buck and Short elected themselves as the two-member
executive committee that would run PERCO. That same day, PERCO offered to
purchase Glenn's shares for just under half of the company's book value, an
offer that was never accepted by Glenn. The following day, PERCO sent Glenn
a letter terminating him as vice-president and company consultant and
informing him he would no longer receive any compensation from the company.
Even though Glenn remained a thirty-eight percent (38%) shareholder in PERCO
and Royals remained one of the company's directors, Buck and Short have
conducted all of PERCO's business since 1994 without consulting either of
them.
In 1997, Royals attempted to enter PERCO's premises with an
environmental engineer to investigate some environmental concerns Glenn had
expressed to him before his death. Following this attempt, PERCO banned
Royals and all other minority shareholders from its premises. Plaintiffs
thereafter filed this action seeking judicial dissolution of PERCO under N.C.
Gen. Stat. § 55-14-30(2)(ii). From a judgment and order granting plaintiffs'
requested relief, defendants appeal.
Section 55-14-30(2)(ii) provides for judicial dissolution of a
corporation when "liquidation is reasonably necessary for the protection of
the rights or interests of the complaining shareholder." If such grounds
exist, the decision to dissolve the corporation is within the trial court's
sound discretion. Foster v. Foster Farms, Inc., 112 N.C. App. 700, 706, 436
S.E.2d 843, 847 (1993). We conclude that the requisite grounds exist and
that the trial court did not abuse its discretion in ordering dissolution. The seminal case with respect to judicial
dissolution of closely-held
corporations pursuant to N.C. Gen. Stat. § 55-14-30(2)(ii) (formerly section
55-125(a)(4)) is Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983).
In Meiselman, our Supreme Court outlined the particular dilemma that minority
shareholders in closely-held corporations often face. Specifically, that
court stated:
[M]any close corporations are companies based on personal
relationships that give rise to certain "reasonable
expectations" on the part of those acquiring an interest
in the close corporation. . . .
Thus, when personal relations among the participants
in a close corporation break down, the "reasonable
expectations" the participants had . . . become difficult
if not impossible to fulfill. In other words, when the
personal relationships among the participants break down,
the majority shareholder, because of his greater voting
power, is in a position to terminate the minority
shareholder's employment and to exclude him from
participation in management decisions.
Id. at 289-90, 307 S.E.2d at 558. Furthermore, "the illiquidity of a
minority shareholder's interest in a close corporation renders him vulnerable
to [other] exploitation by the majority shareholders." Id. at 291, 307
S.E.2d at 559. Given these concerns, our Supreme Court announced that
consideration of the "rights or interests" of the complaining shareholder
under the statute requires analyzing that shareholder's "reasonable
expectations." Id. at 298, 307 S.E.2d at 563. If those expectations are
being frustrated, a court may then consider fashioning appropriate relief to
protect those interests, including ordering dissolution. Id. at 300, 307
S.E.2d at 563.
Specifically, Meiselman outlines a four-step requirement for relief
under the reasonable expectations analysis. First, the complaining
shareholder must prove he had one or more substantial reasonable expectations
that were known or assumed by the other shareholders. Id. at 301, 307 S.E.2d
at 564. Examples of such expectations might include ongoing participation in
the management of the company or secure employment with the company. Id. at290, 307 S.E.2d at 558. Second, he must demonstrate tha
t the expectation or
expectations have been frustrated. Id. at 301, 307 S.E.2d at 564. Next, the
complaining shareholder must show that this frustration of expectations was
not the product of his own fault and was largely beyond his control. Id.
Finally, he must show that the specific circumstances warrant some form of
equitable relief. Id.
[1]At the outset, defendants contend that the trial court ignored two
of these four requirements. Specifically, they argue that the trial court
focused on what expectations the complaining shareholders had, but never
specifically determined whether these expectations were reasonable.
Moreover, they argue that the trial court never specifically concluded that
any frustration of these expectations was not the fault of the complaining
shareholders. We find these arguments unpersuasive. The trial court
specifically determined:
34. The holders of t
he 385 shares of stock in PERCO,
representing approximately 39% of the ownership
interest therein originally owned by A.G. Draughan,
and after his death held by Plaintiffs as executors
of his estate, as well as [certain third-party
defendants], had certain reasonable expectations,
which are set forth below. These reasonable
expectations, which were known or assumed to exist
by Defendants, have been frustrated without the
fault of the complaining minority shareholders.
(Emphasis added). Defendants are correct in pointing out that the bulk of
the trial court's findings are geared towards the other two parts of the
Meiselman test. But Finding No. 34 sufficiently demonstrates that the trial
court did not wholly disregard the reasonableness and without-fault
requirements. We now consider whether the trial court properly applied all
four parts.
[2]As stated, the first part of the Meiselman test requires an analysis
of the complaining minority shareholders' reasonable expectations. The trial
court concluded that the various minority shareholders here had six such
expectations. These can fairly be subdivided into two categories, financialexpectations and management expectations. Each category will b
e analyzed
below.
With respect to the shareholders' financial expectations, the trial
court found the following: (1) all minority shareholders would have a
reasonable opportunity to realize some return on their equity, either in the
form of distribution of PERCO's profits or purchase of their shares at fair
market value; and (2) Glenn would be able to redeem his shares in order to
fund his retirement and/or his estate plan. Defendants contest these
findings by pointing out that, at no time in PERCO's history, had a
shareholder ever received fair market value for his shares. As was the case
with Short's father, Dan Short, the shares had always been purchased at below
market value and then subsidized by additional annual compensation from the
company. Based upon this history, defendants maintain the trial court erred
by concluding that Glenn and the other minority shareholders had an
expectation of receiving fair market return on their equity. We disagree.
Significantly, Meiselman states that a complaining shareholder's
reasonable expectations cannot be viewed in a vacuum; rather they must be
examined and re-evaluated over the entire course of the various participants'
relationships and dealings. Meiselman, 309 N.C. at 298, 307 S.E.2d at 563.
Furthermore, these expectations are not limited to those memorialized in the
by-laws or other written instruments; "[they] must be gleaned from the
parties' actions as well as their signed agreements." 2 F. Hodge O'Neal &
Robert B. Thompson, O'Neal's Close Corporations § 9.30 (3d ed. 1998)
(emphasis added).
Here, all along, Glenn had a reasonable expectation of receiving some
sort of fair value for his shares of stock. There is little doubt that Buck
and Short both knew of, and concurred in, this expectation. See Meiselman,
309 N.C. at 298, 307 S.E.2d at 563 ("In order for plaintiff's expectations to
be reasonable, they must be known to or assumed by the other shareholders andconcurred in by them.") Although Glenn's initial expecta
tion with respect to
fair value might have been less than book value linked with a subsidized
annual compensation or consulting fee, this expectation changed following the
10 February 1994 director's meeting, at which time PERCO cut off Glenn's
compensation altogether. Following this meeting, defendants cannot claim
that the parties had the same expectations as before. Once informed that he
would no longer receive any compensation from PERCO, Glenn could only
reasonably expect that fair value return for his shares now meant his shares
would be purchased at market value. Thus, the trial court correctly
concluded that Glenn had a reasonable expectation in receiving fair market
value for his shares.
However, Glenn is not the only complaining shareholder whose
expectations need to be considered. On the management side, the trial court
concluded that Royals, as one of PERCO's directors, reasonably expected to
have a voice in any business decisions and access to all corporate records.
This finding is supported by the evidence. His election to PERCO's board of
directors by Buck and Short inherently created an expectation that he would
be involved in management decisions and have access to corporate records.
Accordingly, we also conclude that the trial court properly found that Royals
had a reasonable expectation in participating in the management of the
company.
[3]Having concluded that the complaining shareholders had substantial
reasonable expectations here, we now proceed to the second step in the
Meiselman inquiry and determine whether these expectations have been
frustrated by the corporation. There is no question that frustration of
expectations has occurred here. On the financial expectations side, PERCO
has refused to offer fair market value for Glenn's shares (or any other
minority shareholder's shares for that matter). In fact, PERCO essentially
continues to hold these shares captive, forcing the minority shareholders toeither redeem them for significantly less than market value or
hold on to
them until the majority shareholders decide to dissolve the company. On the
management expectations side, Royals has been systematically excluded from
all involvement whatsoever in PERCO, notwithstanding that he is one of its
directors. And when he did try to exercise some management of the company by
bringing in an environmental engineer to investigate certain environmental
concerns, PERCO responded by permanently banning him from the premises.
Next, we consider whether the frustration of these expectations occurred
without the fault of the complaining shareholders. This part of the
Meiselman test has not to date been developed by our courts. Defendants
contend that any frustration of expectations came as the direct result of
Glenn's own sexual harassment activities and that, by cutting off his
compensation, banning him from the premises, and terminating him as an
officer, PERCO was merely looking out for its best interests. We disagree.
By including a fault-based inquiry within the reasonable expectations
analysis, Meiselman essentially requires a court to ask whether the
complaining shareholder's own conduct was the cause behind the frustration.
Thus, in order for fault to be a bar to dissolution, there must be some
causal connection between the frustration of the shareholder's reasonable
expectations and his faulty behavior. For example, a shareholder with an
expectation in management cannot seek dissolution based upon a frustration of
this expectation if he never learns the business nor attends corporate
management meetings. Likewise, a shareholder with an expectation in secure
employment would be barred from seeking dissolution if he embezzled money
from the company. Compare Pooley v. Mankato Iron & Metal, Inc., 513 N.W.2d
834 (Minn. Ct. App. 1994) (upholding trial court's conclusion that the
complaining shareholder's expectations had been frustrated, notwithstanding
his history of assaults and consequent termination) with Exadaktilos v.
Cinnaminson Realty Co., 400 A.2d 554 (N.J. Super. Ct. Law Div. 1979) (barringdissolution because frustration of the complaining shareho
lder's expectation
of participation in management was caused by his own unsatisfactory
managerial performance), aff'd per curiam, 414 A.2d 994 (N.J. Super. Ct. App.
Div. 1980).
We conclude that there was no causal connection between the frustration
of the complaining shareholders' expectations and Glenn's faulty behavior
here. Although Glenn's conduct did warrant some penalty with respect to his
presence and participation in management at PERCO, for purposes of this
analysis, any penalty should not have extended to his realization of a fair
return on his equity in the company. Glenn's compensation was never tied to
any real services he was performing for PERCO at that time. Rather, it was
only part of the parties' original arrangement to help fund Glenn's
retirement and/or estate plan in return for a below-market buyout of his
shares. Any conduct by Glenn should have in no way affected this wholly
separate arrangement. Furthermore, there was certainly no causal connection
between Glenn's conduct and PERCO's systematic exclusion of Royals from
management decisions. This exclusion instead manifests an intent by Buck and
Short to control the company without any minority shareholder or director
input. Accordingly, we conclude that frustration of the complaining
shareholders' reasonable expectations did not result from any fault on their
part.
[4]The last step in the Meiselman test requires us to consider whether
dissolution or some other relief is appropriate under the circumstances. As
previously stated, this analysis is addressed to the sound discretion of the
trial court. Foster, 112 N.C. App. at 706, 436 S.E.2d at 847. We find no
abuse of discretion. The evidence strongly suggests that the minority
shareholders have been permanently frozen out of the company, fiscally and
physically. Glenn's shares are currently in a testamentary trust for the
benefit of his aging widow. The only way these shares will ever produce anymoney for her is if they are liquidated. But PERCO, in the per
sons of Buck
and Short, has demonstrated no interest in offering a fair return for these
shares. Furthermore, PERCO has manifested no desire to involve Royals in any
management decisions whatsoever. Under these circumstances, we conclude that
judicial dissolution is the only way to safeguard the expectations of the
complaining shareholders here.
We do note that the majority shareholders can still prevent dissolution
if they opt to purchase the 385 shares held by the complaining shareholders.
Our statutes specifically provide:
In any proceeding brought by a shareholder under G.S. 55-
14-30(2)(ii) in which the court determines that
dissolution would be appropriate, the court shall not
order dissolution if, after such determination, the
corporation elects to purchase the shares of the
complaining shareholder at their fair value, as
determined in accordance with such procedures as the
court may provide.
N.C. Gen. Stat. § 55-14-31(d) (1999). After considering an independent
appraiser's report of PERCO's value, the trial court found the fair value of
each share to be $635. Defendants have not contested this finding in their
brief. Accordingly, defendants can prevent dissolution by purchasing the
complaining shareholders' stock for $635 per share.
[5]In their final assignment of error, defendants claim the trial court
improperly taxed them the entire cost of the independent appraiser's
valuation report. We disagree. N.C. Gen. Stat. § 7A-305(d)(7) specifically
allows appraisal costs to be assessed against a party. The trial court then
has discretion whether or not in fact to award these costs. N.C. Gen. Stat.
§ 6-20 (1999). Its decision is not reviewable absent an abuse of that
discretion. Brandenburg Land Co. v. Champion International, 107 N.C. App.
102, 103, 418 S.E.2d 526, 527 (1992). We find no abuse here.
Defendants claim that the trial court abused its discretion by ignoring
the court's pre-trial case management order, in which the court stated that
appraisal costs would be shared by both parties. But that order alsospecifically stated the court could amend any of its provisions when
appropriate. The court did so in its final judgment, when it ordered only
defendants to pay the appraisal costs. By doing that which it was
specifically empowered to do, i.e., change the terms of the case management
order, the trial court cannot be said to have abused its discretion.
Accordingly, defendants' final assignment of error is without merit.
Affirmed.
Judges JOHN and EDMUNDS concur.
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