Gerring Props. v. Gerring

The appellate court of Minnesota considered appeals and cross-appeals in a series of shareholders’ disputes. The appellants are Gerring Properties Inc. (GP) and Quality CarWash Operations Ltd. (QCW). QCW operated a family-owned car-wash facility in Minnesota, leasing the land and equipment from GP. The Gerring brothers and some children now “accuse each other of various improprieties spanning decades.” Respondents included one of the brothers, Martin Gerring, and his wife, Lori-Ann Gerring. The three Gerring brothers comprised the board of directors. The ownership shares in GP were currently divided equally between two shareholder factions.

There was a history of lack of compliance with corporate requirements and record-keeping, which created tension between the family factions. Tensions rose due to transferring ten shares from Virginia Gerring, the matriarch, to Lori-Ann. This resulted in the two-family factions owning equal shares of GP. The family factions also disagreed on how to manage and finance companies.

​​In September 2016, Martin and Lori-Ann were terminated as employees of QCW. The appellants asserted that Martin engaged in misconduct by failing to comply with orders from the board of directors. The district court found that Martin had a reasonable expectation of continued employment, income, and access to financial records. The district court found that Martin did engage in conduct in violation of board directives. However, the district court also found that the primary reason for his termination was to force Lori-Ann to transfer ownership of her shares back to Virginia.

The district court also determined a buyout to be the appropriate remedy for the respondents to receive value for their ownership interests. The district court appointed a special master to provide valuations of the companies and assist in the buyout process. The independent appraiser determined “that the fair-market values as of August 22, 2016 (the valuation date set by the court) were $1,150,000 for QCW and $1,696,899 for GP.” The special master recommended that the appellants pay the respondents the full value of their ownership interests in cash 60 days after the district court’s order entry. The special master disagreed with the appellants’ contention that a DLOM should is applied to the buyout price, citing the Follett case, which required extraordinary circumstances in applying a DLOM. The appellants argued that the independent appraiser had “double-counted” the value of QCW. The district court adopted the special master’s recommendations, concluding that QCW had not been double-counted. The district court also adopted the special master’s opinion that 60 days was reasonable for the appellants to pay the respondents in cash. If the appellants failed to make the stated payment, the district court ordered that the companies be dissolved and the assets would be sold at the highest value.

​​Decision

The district court did not abuse its discretion in finding unfairly prejudicial conduct warranting equitable relief under Minn. Stat. § 302A.751. Unfavorably prejudicial conduct included behavior that frustrated reasonable expectations of the shareholder. The reasonable expectations of closely held corporation shareholders had “a job, salary, a significant place in management, and economic security for [the shareholder’s] family”(Pedro v Pedro). The district court found the reasonable expectation of continued employment because Martin was a long-term employee since before its incorporation, and the shareholders have historically received distributions of profits. Martin had received no monetary benefit from his ownership since his termination. The district court did not abuse its discretion in finding unfairly prejudicial conduct.“Martin was not required to plead wrongful termination to bring a claim for equitable relief for wrongful termination.”

The district court did not abuse its discretion by ordering a buyout of the respondents’ shares. A court-ordered buyout is an equitable remedy. District courts have broad powers in fashioning a fair buyout. Absent an agreement among the parties, the district court can set payment terms to determine the equitable remedy. The appellants argued that the district court inappropriately applied the holdings of Follettby, requiring the buyout to occur within 60 days, which they claim was objectionably impossible, and by not using a marketability discount to the purchase price. Factors to be considered in determining whether extraordinary circumstances exist include whether the buyer or seller has acted in an unfairly oppressive way to the other or has reduced the value of the corporation; whether the oppressed shareholder has other remedies; or whether any condition of the buyout including price would be unfair to the remaining shareholders because it would be unduly burdensome on the corporation. Here, neither the record nor the district court’s contention supported the existence of extraordinary circumstances. The special master said that he believed that 60 days was reasonable to pay the respondents and that any payment in an incremental fashion” would place the respondents at risk of not achieving total value for their shares. It was reasonable for the district court to accept the special master’s recommendations. The district court did not abuse its discretion in not applying a DLOM to the purchase price nor requiring the buy-out to be completed in 60 days.

The district court did not abuse its discretion in ordering the dissolution of the companies. The appellants argued that the district court abused its discretion in ordering the dissolution of the companies in the absence of sufficient findings. Since the district court found that the appellants failed to exercise the option to purchase within the district court’s parameters and that additional time would not likely achieve the buyout, dissolution was the only reasonable way for the respondents to obtain value for their ownership interests. The district court also found other options to be unfeasible. “Although some of the shareholders continued to receive benefit through their employment at the Companies, the court found that this benefit did not outweigh the impact of the shareholder deadlock and prejudicial conduct towards respondents.” The district court made specific findings of irreconcilable shareholder deadlock and concluded that dissolution was the only reasonable option. The district court did not abuse its discretion.

The district court did not abuse its discretion in valuing the respondents’ shares. Here, the issue was the valuation of the shares of a closely held corporation in a buyout. If the parties cannot agree on a value, the court shall determine the value of the shares.“The court shall determine…the fair value of the shares, taking into account any and all factors the court finds relevant, computed by any method or combination of methods that the court, in its discretion, sees fit to use, whether or not used by the corporation or by a dissenter.” [T]he district court has broad discretion and authority to determine the fair value of the shares in whatever way it deems appropriate.” The appellants argued that the independent appraiser “double-counted ” the going-concern valuation of QCW. The appraiser testified that he did not double count QCW’s value and explained why. The district court did not abuse its discretion in adopting the valuation of the companies from the special master’s report.