U.S. Bank N. A. v. Cold Spring Granite Co., A10–0252.

• Decision Date: 07 September 2011
• Docket Number: No. A10–0252.,A10–0252.
• Citation: 802 N.W.2d 363
• Parties: U.S. BANK N. A., et al., Appellants,v.COLD SPRING GRANITE COMPANY, et al., Respondents,andPatrick D. Alexander, Respondent.
• Court: Minnesota Supreme Court

802 N.W.2d 363

U.S. BANK N. A., et al., Appellants,

v.COLD SPRING GRANITE COMPANY, et al., Respondents,andPatrick D. Alexander, Respondent.

No. A10–0252.

Supreme Court of Minnesota.

Sept. 7, 2011.

Syllabus by the Court

1. The term “fraud” as used in Minn.Stat. § 302A.423 (2010) refers to common law fraud.

2. A reverse stock split and redemption of fractional shares for cash does not give rise to dissenters' rights under Minn.Stat. § 302A.471 (2010).

3. Unfairly prejudicial conduct under Minn.Stat. § 302A.751 (2010) means conduct that frustrates the reasonable expectations of the shareholder.

4. Undertaking the procedures necessary to redeem a minority shareholder's shares for cash in a reverse stock split does not, without more, breach the common law fiduciary duty a board of directors and majority shareholders have toward the minority shareholder.

5. The district court did not err in determining the fair value of the stock of minority shareholders when it adopted a valuation of the closely-held corporation that relied in part on asset value.

6. Appellant not prevailing in the district court was not entitled to interest, fees, and costs.

Peter J. Gleekel, Craig S. Krummen, Winthrop & Weinstine, P.A., Minneapolis, MN, for appellants.William Z. Pentelovitch, Wayne S. Moskowitz, Martin S. Fallon, Maslon, Edelman, Borman & Brand, LLP, Minneapolis, MN, for respondents Cold Spring Granite Company, et al.Joseph W. Anthony, Cheryl A. Stanton, Anthony Ostlund Baer & Louwagie, P.A., Minneapolis, MN, for respondent Patrick D. Alexander.

OPINION

ANDERSON, G. Barry, Justice.

This case arises out of a reverse stock split in which minority shareholders were forced to accept cash in exchange for their shares. Thomas Moore, Ann McCabe, and U.S. Bank (Moores) are trustees of eight appellant family trusts (Moore Trusts) that brought suit against respondent Cold Spring Granite Company (CSG) and its chairman and CEO respondent Patrick D. Alexander after CSG stock belonging to the trusts was fractionalized in a reverse stock split and redeemed for cash at a price determined by CSG's board of directors (Board). The district court appointed a special master who conducted a bench trial and issued recommended findings of fact and conclusions of law. After the trial, the court accepted the special master's recommendations and dismissed all of the Moores' claims. The court of appeals affirmed, and we granted the Moores' petition for review of the decision of the court of appeals and now affirm.

The Cold Spring Granite Company, a Minnesota corporation, has been in the granite business since 1898. Respondent Patrick D. Alexander has been CSG's CEO since 1983 and the chairman of the Board since 1997. Alexander is also a shareholder of CSG. Appellants Thomas Moore, his sister Ann McCabe, and U.S. Bank are trustees, in varying combinations, of eight family trusts, all of which owned CSG stock until the reverse stock split at issue in this case.

Capitalization of CSG

CSG has three types of stock: preferred, Class B common, and Class A common. Preferred shares do not have voting rights, but are entitled to annual dividends. Common shares do not receive dividends, but have voting rights (100 votes per Class B share and one vote per Class A share). Before the reverse stock split at issue, there were 151,396 shares of preferred stock outstanding, which were held by more than 300 shareholders. There were 70 shares of Class B common stock outstanding, all of which Alexander owned. Finally, there were 76,890 shares of Class A common stock. Alexander and the Alexander Family Trust, of which Alexander was trustee, together owned approximately 93% of the Class A common stock. The Moore Trusts collectively owned 5,067 shares, or 6.58% of the Class A common stock.

Alexander's Previous Offers to the Moores

After Alexander became CEO in 1983, he made several attempts to acquire all minority holdings of CSG stock. In 1985 the company offered to convert its common stock to preferred stock. The vast majority of shareholders accepted this offer. But the mother of Moore and McCabe, then trustee of the Moore Trusts, rejected the offer, believing the conversion value of the common stock was too low. Alexander also attempted to purchase the Moores' stock in 1990 and 1998; his offers were again rejected.

Kahlert Litigation

In May 2005, two other minority shareholders of CSG, John Kahlert and James Kahlert (Kahlerts), filed a derivative action on behalf of CSG against CSG's management, alleging breaches of fiduciary duty. Ann McCabe submitted an affidavit in support of the Kahlerts expressing concern that CSG was profitable but had not paid dividends. The district court dismissed the Kahlerts' action.

Despite its dismissal, the Kahlerts' litigation sparked additional efforts by Alexander to buy out CSG's minority shareholders. In January 2006, counsel for CSG advised the Board at a special meeting that minority shareholders of CSG could be removed for the cash value of their shares by effecting a reverse stock split, to be followed by redemption of resulting fractional shares for cash. Counsel further advised the Board that, unlike a cash-out merger, a reverse stock split would not require a shareholder vote and would not give shareholders the right to judicial determination of the fair value of their shares. To avoid fractionalization of the Alexander family's holdings, CSG's counsel recommended that the shares held by Alexander personally be combined with those held by the Alexander Trust into a newly formed holding company.

The Board discussed appraisals of the company to determine how much the Class A common shares were worth. CSG had been appraised several times since 1994 for unrelated purposes. Also, by this time, Alexander and other members of CSG's management had already begun to arrange for the appraisals of the company necessary for the purpose of removing minority shareholders. The various appraisals of CSG that had been done over the years are as follows.

Appraisals of CSG

Between 1994 and 2001, Piper Jaffray and U.S. Bank conducted a number of valuations of CSG. The valuations varied widely, from a low value of $13.8 million in 1994 and reaching a high value of $94.5 million in 1999. By 2001, U.S. Bank valued the company at $35 million. Additionally, CSG management personnel undertook a number of valuations of CSG between 2004 and 2005. In October 2004, Chief Financial Officer Greg Flint created a spreadsheet of possible valuations of CSG in order to understand how much money the company might need to pursue a redemption of minority shareholders. The valuations ranged from $77 million to $209 million, and were labeled “A” through “D”. Flint testified that Alexander and the CSG board told him that the “A” projection was “too pessimistic.” Accordingly, Flint prepared three versions titled “B” through “D,” based on aspirational sales projections. Flint also prepared a valuation entitled “D–1,” based on version “D” on June 23, 2005. This version valued CSG at $142 million, again, based on aspirational sales figures. As it happened, CSG did not meet even the sales figures used in the version “A” projection, and all of Flint's valuations appear to have been overly optimistic compared with the subsequent financial performance of CSG. This variation was due to CSG's financial troubles. In 2003, CSG adopted an aggressive growth strategy, which involved opening residential countertop stores across the nation. By 2005 this strategy had failed, and CSG had begun making cost-cutting measures.

On June 23, 2005, CSG board member Patrick Mitchell, who is not a trained appraiser, prepared a handwritten valuation in connection with preparations to eliminate minority shareholdings. Mitchell valued the company at a range from $74.3 million to $162.7 million. Finally, CSG prepared three budgets for 2006 to be given to U.S. Bank, based on three different scenarios with respect to a buyout of minority shares. These budgets did not undertake to value CSG as a whole.

The Kahlerts commissioned an appraisal of CSG from Schmidt Financial in connection with their lawsuit. The Schmidt report was dated February 10, 2005, and valued CSG at $246.7 million as of December 31, 2004. Schmidt relied heavily on management-provided financial analyses. CSG hired Arthur Cobb, a CPA with over 30 years of litigation appraisal experience, to critique the Schmidt report. Cobb's critique report concluded that the Schmidt report was “a superficial, mathematical exercise, apparently designed to compute an extreme overstated estimate of value.”

Cobb also conducted an independent appraisal of CSG. Cobb's appraisal report valued CSG at $85 million as of December 31, 2005. Cobb considered three valuation approaches: the market approach, the income approach, and the net asset value approach. Cobb rejected a final determination based on the market approach, concluding that there were no businesses sufficiently comparable to CSG to yield an accurate determination of CSG's value. Cobb then valued CSG using the income approach and the asset approach. Using the asset approach, Cobb valued the non-operating investment land separately from the granite operations. He valued the non-operating land at $20 million, because it was producing no income. Cobb then valued the granite operations using the income approach at $37–40 million, and using the asset approach at approximately $57 million. Because Cobb concluded that the asset value should establish the minimum value of the company, and the asset value was higher than the income value, he adopted the asset value in his final valuation. Finally, Cobb added $5 million in equity investments to reach his final total of approximately $85 million.

In December 2005, CSG retained Jason Vavra of Chartwell Financial to prepare an opinion comparing the Schmidt report with Cobb's critique report and appraisal report. Vavra concluded that Cobb's value was...