Robinson v. Langenbach

Context is “crucial,” the Supreme Court of Missouri recently said in upholding the use of discounts in the court-ordered buyout of a minority owner’s shares in a family business. At the same time, the court acknowledged that, “usually,” the rationale for discounts in a mandated sale to a majority stockholder “would have limited application.”

Avoid double recovery

The impetus for this litigation was a dispute among three siblings holding equal interests in a family business. The plaintiff served as president and treasurer. When the company floundered during the 2008 recession, the two defendant siblings began to express dissatisfaction with the plaintiff’s management of the company. Eventually, they ousted the plaintiff from her positions and prevented her from entering company premises and accessing company records. When she was ousted, she received no salary, severance pay, benefits, or dividends as a shareholder of the company. The plaintiff sued the remaining shareholders for breach of fiduciary duty and shareholder oppression. The fiduciary duty case went to the jury, which awarded the plaintiff $390,000, which represented the increase in the company’s value for four years following her removal from the company. In a bench trial, the court found the defendants’ removal of the plaintiff was shareholder oppression and ordered a buyout of the plaintiff’s shares for fair value.

Both parties presented valuation expert testimony, but the state Supreme Court’s opinion contains little detail. It says the trial court stated the defense expert “applied marketability and minority discounts primarily, but not exclusively because the jury had already awarded [the plaintiff] a return on capital for a period of years following her termination” based on the original breach of fiduciary duty trial. The defense expert explained the discounts served to avoid double recovery. The trial court adopted his fair value conclusion.

On appeal to the state Supreme Court, the plaintiff contested the fair value determination, specifically the imposition of discounts. Even if the discounts might be appropriate in determining fair value of minority shares “willingly sold to third parties on the open market,” discounts were not justified where the minority interest holder was forced to sell her shares to an oppressive majority shareholder, the plaintiff argued. She cited an 8th Circuit case, Swope v. Siegel-Robert, in which the U.S. Court of Appeals, in a dissenting shareholder action, said the applicable state statute did not allow for the use of discounts in the forced sale of a minority interest holder’s shares as this would penalize the minority shareholder and “encourage” the majority shareholders to take advantage of their power.

In the instant case, the state Supreme Court did not reject the 8th Circuit’s holding in the Swope case. Further, the high court said the trial court had not disputed the holding of Swope nor had it proposed any broad principle of law as to the application of these discounts. The trial court simply agreed with the defendants’ expert that, “on these particular facts … a discount was proper.” The “particular facts,” according to the high court, were that the jury, in awarding damages for breach of fiduciary duty, compensated the plaintiff for the increase in the company’s value for four years following her removal from the company. The state high court noted that the plaintiff’s claims of breach of fiduciary duty and shareholder oppression “clearly did overlap,” lending support to the defense expert’s testimony that discounts would avoid double recovery.

At the same time, the Supreme Court expended a lot of effort explaining how fair value does not equal fair market value and it went as far as overturning an old Missouri case in which the very court had suggested that, under state law, “fair value” and “fair market value” have the same general meaning.