Pitsch v Pitsch Holding Co.

In this shareholder deadlock case, the Michigan Court of Appeals affirmed the decisions of the trial court to order a sale of the plaintiffs’ shares of Pitsch Holding Co. (PHC) to the defendants and to determine the price of the shares at a price the special master (Amicus) determined using a modified-liquidation value methodology.

Background.

The individual litigants in this long and bitter dispute were sibling shareholders of PHC. In conflict were the last two paragraphs of the 2018 decision of the Court of Appeals in this matter. In part, the 2018 opinion read: “We believe it is time to give the parties what they have requested. Accordingly, we remand this matter to the circuit court so that the court may order the dissolution of the company.”

At the remand hearing, the parties agreed to an appointment of a special master with certain conditions. The trial court appointed Amicus Management “to conduct [an] investigation into the finances and operations of [PHC] to make recommendations to the court regarding asset valuation and proposed methods for a disposition of [PHC] and its assets.”

Amicus reached a valuation of $1,859,923 per shareholder if one side sold to the other, saying it would receive “much less” if PHC were dissolved. Amicus convinced the defendants to purchase the plaintiffs’ stock. The plaintiffs objected to the offset of cash advances they had received that were to be advance payments for part of the amount due on the purchase of their shares, saying that a forced sale of their shares was beyond the trial court’s authority on remand. 

On testimony, Bernard Klukowski of Amicus recommended that the stock’s forced sale was the best way to maximize value. “Klukowski acknowledged that his valuation did not account for the cash advance receivables, the value of noncompetition agreements, or a going concern value and that certain expenses deducted from the value of PHC’s assets would not be incurred under the present forced-sale scenario.” Daniel Yeomans, Klukowski’s supervisor at Amicus, agreed and testified that the “modified liquidation value” was close to the middle between the liquidation value and the fair market value of the shares. Yeomans also acknowledged that a downward adjustment made in the value of PHC for possible tax on a liquidation sale would not be necessary for a stock purchase.

The trial court determined it had the authority on the remand to force a stock sale by accepting the Amicus value of $1,959,023 and adding $159,030 to equalize the advance payments before the repurchase. “When resolving a shareholder deadlock in a close corporation such as PHC, a court may resort to equitable remedies other than those provided by statute.” (Stott Realty Co. v Orloff, 1933) Among those remedies is ordering one faction to purchase the other shares.

Valuation.

The plaintiffs challenged the per-shareholder value the trial court determined. The Court of Appeals reviewed this for clear error. The Court of Appeals noted that the trial court had “great latitude” in finding the value of a closely held business. Here, the trial court intended for Amicus, the special master, to “evaluate PHC in a manner that would maximize value to the individual shareholders. Plaintiffs have never cited any specific error in Amicus’s reasoning, assumptions, valuation techniques, calculations, or conclusions. Rather, the essence of plaintiffs’ challenge is to the ultimate value selected by the trial court out of the various valuation methods employed by Amicus.” The trial court found that Amicus, through Klukowski’s testimony, effectively defended its choice of the modified-liquidation value. The plaintiffs argued that the value of the assets sold in the market should be used, but they did not explain how this would maximize their value. They also argued that Amicus’ value was reduced for costs that would only be incurred if PHC were liquidated. Klukowski testified that if the defendants purchased the stock, the liquidation-related expenses and taxes would add $344,497 to each shareholder’s value. The Court of Appeals determined it was not clear that the trial court erred in not adding these expenses back, noting that “Amicus worked to convince one side or the other to buy the other side’s stock. Significant negotiations and compromises were made before defendants agreed to purchase plaintiffs’ shares.” “Klukowski’s testimony that a forced sale would do [provide a maximized value to the shareholders], Yeomans’ testimony that $1,859,923 was a ‘very fair price,’ and all parties’ initial willingness to sell their stock for that amount, we are not left with a ‘definite and firm conviction’ that the trial court erred.”

The Court of Appeals affirmed the trial court on all issues.