MT Properties, Inc. v. CMC Real Estate Corp.

• Decision Date: 25 February 1992
• Docket Number: No. CX-91-1054,CX-91-1054
• Citation: 481 N.W.2d 383
• Parties: MT PROPERTIES, INC., Petitioner, Respondent, v. CMC REAL ESTATE CORPORATION, a Wisconsin Corporation, formerly known as Chicago, Milwaukee, St. Paul and Pacific Railroad Company, Appellant.
• Court: Minnesota Court of Appeals

Page 383

481 N.W.2d 383

MT PROPERTIES, INC., Petitioner, Respondent, v. CMC REAL ESTATE CORPORATION, a Wisconsin Corporation, formerly known as Chicago, Milwaukee, St. Paul and Pacific Railroad Company, Appellant.

No. CX-91-1054.

Court of Appeals of Minnesota.

Feb. 25, 1992.

Syllabus by the Court

1. Upon the election of dissenting shareholders after a fundamental corporate change, they are entitled to receive payment for the "fair value" of their shares from the remaining shareholders. Having determined the fair value of the corporation as a going concern, discounting the value of the dissenter's interest because of its minority status improperly increases the 2. Attorney fees may be assessed against a dissenting shareholder when litigation is pursued in bad faith. However, when the shareholder prevails, even in part, the claim of bad faith fails and the statutory assessment of costs against the corporation must be imposed.

value of the remaining shareholders' shares.

3. Issues may be tried by consent even though they are not raised in the pleadings. However, mere reference to an issue during trial, without more, does not constitute trial by consent of that issue.

Timothy R. Thornton, Colleen V. Short, Briggs and Morgan, P.A., Minneapolis, for respondent.

Terence M. Fruth, Norman J. Baer, Fruth & Anthony, P.A., Minneapolis, for appellant.

Considered and decided by NORTON, P.J., and RANDALL and CRIPPEN, JJ.

OPINION

CRIPPEN, Judge.

CMC Real Estate Corporation owned a minority interest in MT Properties, Inc. In a proceeding brought to determine the value of CMC's shares as a dissenting shareholder, the trial court dismissed CMC's challenge to the valuation of its interest provided by MT. The trial court found: the amount tendered by MT was the correct amount, this amount would be further reduced by an outstanding debt of $63,000 owed to MT, and CMC's refusal of the tendered offer was meritless such that MT was entitled to an award of costs and attorney fees totaling $100,714.67. Because we conclude that the trial court improperly discounted the value of CMC's shares, we reverse and remand.

FACTS

By the beginning of 1987, there were five railroad corporations which owned the Minnesota Transfer Railway Company. One of these companies was CMC, formerly known as the Chicago, Milwaukee, St. Paul & Pacific Railroad Company. CMC held a one-ninth ownership interest in Minnesota Transfer.

For a number of reasons, the majority of shareholders of Minnesota Transfer sought to merge the corporation with another railroad company and lease all of the railroad operations to a third person. The companies merged on February 17, 1987 and the surviving corporation was renamed MT Properties.

At the time of the merger, CMC asserted its dissent pursuant to Minn.Stat. §§ 302A.471, 302A.473 (1986), triggering its statutory right to receive the "fair value" of its shares in the corporation. Subsequently, MT tendered to CMC its estimate of CMC's share of the corporation's value on February 16, 1987: $559,084.68, plus interest. CMC disputed this amount and demanded a supplemental payment. MT refused and brought suit as petitioner under Minn.Stat. § 302A.473, subd. 7.

After a two week trial, the district court concluded that MT's earlier valuation had been entirely appropriate and that CMC's challenge was essentially baseless. Pertinent to this appeal the trial court found that: the base value of the corporation was $9,451,000; CMC's claimed value of $25 million was unsupported by the evidence; the base value should be reduced by $3 million (31% of the base value) to reflect environmental and labor contingency concerns; the value of CMC's shares in the corporation would be further discounted by twenty-two percent to reflect its minority status; the value of CMC's shares was $559,084.68 plus interest; CMC owed MT $63,000 from a preexisting debt; and MT was entitled to an award of attorney fees and costs in the amount of $100,714.67.

ISSUES

1. Did the trial court improperly calculate the value of CMC's shares in MT by including a discount for CMC's minority status?

2. Did the trial court improperly determine the allocation of costs and fees between the parties?

3. Was there sufficient evidence for the trial court to conclude that CMC owed a preexisting obligation to MT in the amount of $63,000?

ANALYSIS

The trial court's findings of fact will not be set aside unless the reviewing court finds them to be clearly erroneous. Minn.R.Civ.P. 52.01; see In re Trust Known as Great N. Iron Ore Properties, 308 Minn. 221, 225, 243 N.W.2d 302, 305 (reviewing court will set aside trial court findings of fact if it strongly believes that mistake has been made), cert. denied, 429 U.S. 1001, 97 S.Ct. 530, 50 L.Ed.2d 612 (1976); Hertz v. Hertz, 304 Minn. 144, 145, 229 N.W.2d 42, 44 (1975) (valuation of property is a finding of fact which will not be set aside unless clearly erroneous on the record as a whole). Questions of law are reviewed de novo. Karst v. F.C. Hayer Co., 447 N.W.2d 180, 181 (Minn.1989).

1. Minority Discount

a. Analysis of facts

Before discussing the law on this issue, we must first examine characteristics of the twenty-two percent discount the trial court applied to the value of CMC's shares. CMC contends the discount focuses on the minority status of their shares. MT contends that the discount represents a marketability discount which was properly applied to the value of the corporation as a whole.

The trial court found expert testimony had established that the discount reflected "the unmarketable nature" of CMC's shares. We initially observe, however, that the voluminous findings of fact in the trial court's order contain several inconsistencies which cast doubt upon this description of the discount. At one point the court stated that the adjustment reflected a marketability discount which included a "minority liquidation discount." Trial Court Finding of Fact No. 123. Later the court noted the "unmarketable nature" of CMC's shares (Trial Court Finding of Fact No. 138), but also referred to CMC's minority interest as a basis for the discount (Trial Court Finding of Fact No. 144). The court's calculation of the discount describes the twenty-two percent figure as a "minority and marketability" discount. Trial Court Finding of Fact No. 148.

More critically, the record reveals that the discount was designed solely to reflect CMC's minority status. The record reveals that the source of the twenty-two percent figure is MT's valuation expert, Benjamin Anderson of Standard Research Consultants. In his valuation summary report, Anderson stated that his twenty-two percent calculation represents a "minority discount" reflecting the inability of the shareholder to force a liquidation. At trial, Anderson testified that the discount was for CMC's minority interest. More importantly, Anderson stated that a marketability discount was considered yet never applied. Significantly, Anderson testified that in the instant case a marketability discount was not appropriate. Finally, the only other possible source of the twenty-two percent discount, MT's general counsel Gordon Forbes, based his figure on Anderson's work and stated that he basically adopted Anderson's approach.

Given this record, we find no merit in attempts to clothe the twenty-two percent discount in trappings other than those addressing the minority status of CMC's shares. There is simply no evidence in the record to support these attempts. The trial court's findings concerning marketability discounts are clearly erroneous because the twenty-two percent discount figure singularly reflects the fact that CMC owned a minority interest.

b. Discussion of law

Having established that the discount applied was attributable solely to the minority status of CMC's shares, our inquiry focuses on the validity of such a minority discount under Minnesota law. Minority interests in corporations are protected from certain fundamental corporate changes under Minn.Stat. § 302A.471 which enables the dissenting shareholder to "obtain payment for the fair value of the shareholder's shares" when the shareholder dissents. Minn.Stat. § 302A.471, subd. 1. "Fair value of the shares" is defined as "the value of the shares of a corporation immediately before the effective date" of the corporate change. Minn.Stat. § 302A.473, subd. 1(c). Minnesota courts have never addressed whether the value of a dissenting shareholder's shares may be discounted for their minority status when determining "fair value."

CMC argues that, as a matter of law, a dissenter's share of a corporation's value should not be discounted because this penalizes the dissenter and operates against the purpose of statutory dissenter's rights. MT argues in response that a

minority discount is typically applied because the fair market value of stock can only be realized if a shareholder has control. A minority shareholder does not have control, so his shares must be discounted.

Because this is an issue of first impression in Minnesota, we have examined authorities from other jurisdictions which have dealt with similar issues. The courts which have addressed the issue of minority discounts have split. ¹ Courts in Delaware, Rhode Island, Iowa, Missouri, Maine, California, Colorado and Oregon are among those where minority discounts have been rejected in various circumstances. ² These courts reason that allowing discounts to reduce the "fair value" of a dissenter's shares destroys legislation enacted to protect the minority's right to dissent from a fundamental corporate change:

It is contrary to the purpose of the statute to discount the minority interest because it is a minority. This in effect would let the majority force the minority out without paying it its fair share of the value of the corporation.

Woodward, 257 Iowa at 1087, 133 N.W.2d at 43. The Delaware Supreme Court rejected application of minority discounts because...