Alaska Plastics, Inc. v. Coppock, s. 4745

• Decision Date: 12 December 1980
• Docket Number: 4771,Nos. 4745,s. 4745
• Parties: ALASKA PLASTICS, INC., an Alaska Corporation, Ralph R. Stefano, C. Harold Gillam, and Robert L. Crow, Appellants and Cross-Appellees, v. Patricia M. COPPOCK, Appellee and Cross-Appellant. File
• Court: Alaska Supreme Court

Page 270

621 P.2d 270

ALASKA PLASTICS, INC., an Alaska Corporation, Ralph R Stefano, C. Harold Gillam, and Robert L. Crow Appellants and Cross-Appellees, v. Patricia M. COPPOCK, Appellee and Cross-Appellant.

File Nos. 4745, 4771.

Supreme Court of Alaska.

Dec. 12, 1980.

Mary A. Nordale, Fairbanks, for appellants and cross-appellees.

Olof K. Hellen, Hellen & Partnow, Anchorage, for appellee and cross-appellant.

Before RABINOWITZ, C. J., CONNOR, BURKE, and MATTHEWS, JJ., and DIMOND, Senior Justice.

OPINION

CONNOR, Justice.

The issue in this case involves the rights of a minority shareholder in a close corporation who allegedly has been deprived of benefits accorded other shareholders. The trial judge concluded that the corporation was obligated to buy the minority shareholder's stock at its fair value. We have concluded that this remedy is not available on the present record as a matter of law. Accordingly, we remand to the superior court to determine whether, based upon adequate findings of fact and conclusions of law, a remedy more appropriate to the alleged facts is available.

Those facts which the parties have stipulated to or which appear to be undisputed in the record are summarized below.

In 1961 the three individual appellants, Ralph Stefano, C. Harold Gillam, and Robert Crow formed a corporation known as Alaska Plastics and began to produce foam insulation at a building they bought in Fairbanks. Each of the three incorporators held 300 shares of stock. In 1970 Crow was divorced and, as part of a property settlement, gave his former wife, Patricia Muir, 150 shares or a one-sixth interest in the corporation. ¹ From the time of incorporation until this lawsuit, Stefano, Gillam and Crow have been the only directors and officers of Alaska Plastics.

Stefano conceded at trial that the corporation forgot to notify Muir of annual shareholders meetings in 1971 and 1974. It was also undisputed that Muir was not notified of a shareholders meeting in 1972. According to Muir's testimony she was told of the 1973 shareholders meeting about three hours before the meeting was held.

In 1971 and 1972, Stefano, Gillam and Crow held the shareholders meetings in Seattle. It appears from Stefano's testimony that he and Gillam also brought their wives to these meetings at company expense, but he conceded that there was no business purpose for doing so.

In 1971, Stefano, Gillam and Crow voted themselves each a $3,000 annual director's fee. Although director's fees were apparently paid from 1971 through 1974, the three directors have never authorized Alaska Plastics to pay dividends. In 1974 the three board members also authorized an annual salary of $30,000 a year for Gillam, who was then employed as general manager of Alaska Plastics. Muir testified that she has never received any money from the corporation.

At the 1974 board meeting Stefano, Gillam and Crow also decided to offer Muir $15,000 for her shares and on May 1, 1974, Stefano wrote Muir informing her of the corporation's offer. Thinking the firm's offer was too low, Muir retained a lawyer who wrote the corporation expressing her concern both regarding the offered price and regarding the corporation's failure to inform Muir of shareholders meetings. In July, 1974, Muir's lawyer made a further demand on the corporation to inspect the books and records of the corporation. Gillam apparently advised Muir where the firm kept its books and told her they could be made available. An accountant employed by Muir did investigate the company's books and estimated that the shares might have a value somewhere between $23,000 and $40,000. Muir also ordered an appraisal of Alaska Plastics' Fairbanks property.

Later that same year, at a special director's meeting in October, 1974, the three board members agreed to make a $50,000 offer for Broadwater Industries, a firm located neat Palmer that made a type of plastic foam insulation similar to that produced by Alaska Plastics at their Fairbanks plant. The purchase was apparently accomplished at some time between October and the next shareholders meeting, which was held on April 25, 1975. Muir testified that she was never consulted about the purchase and first learned about it at the 1975 meeting. At that meeting, however, she did not dissent from a shareholder vote ratifying all the acts of the directors and officers for the previous year.

Broadwater Industries was subsequently renamed Valley Plastics and is now a wholly-owned subsidiary of Alaska Plastics. The directors and officers of Valley Plastics are Stefano, Gillam and Crow.

At the 1975 shareholders meeting, Muir offered her stock to the corporation for $40,000. In June, 1975, the board raised its offer to $20,000, which Muir again rejected.

Shortly after these negotiations failed, Alaska Plastics' Fairbanks plant, which was not insured, burned to the ground. The fire caused a total loss. Since the fire, Alaska Plastics has ceased production from Fairbanks and the corporation has not made an attempt to resume production in Fairbanks. All the remaining manufacturing and sales of Alaska Plastics are accomplished through its subsidiary, Valley Plastics. The fire, in effect, turned Alaska Plastics into a holding company for its affiliate.

About a year after the fire, in 1976, Stefano, acting as an individual, made a further offer of $20,000 to Muir, but the purchase never took place. Further attempts by the parties to negotiate a purchase or settlement failed and a lawsuit was filed in October 1976.

An amended complaint alleges ten separate causes of action, and prays for relief both in the name of the corporation and individually for Muir. After trial, the case was submitted to an advisory jury ² on two issues. The first issue was whether Stefano, when he acted as an individual, breached a contract to purchase Muir's shares. The jury found no contract. The second issue was whether the corporation's offer to buy Muir's shares was "equitable." The jury found that the corporation's offer of $15,000 in 1974 was not equitable, and determined that a fair offer would have been $32,000. Following the jury's verdict, the trial judge issued a judgment which states in part:

"(T)he continued retention by Plaintiff of one-sixth of the shares in Alaska Plastics, Inc. following the offer on April 1974 was oppressive to Plaintiff and ... an appropriate remedy would be to direct the transfer of Plaintiff's shares to Alaska Plastics, Inc. in exchange for a fair and equitable value...."

A total judgment was entered against the three individual appellants and Alaska Plastics for $52,314, which represented $32,000 for the value of the shares, $5,200 for attorney's fees, and $15,144 in interest and costs. Muir was in turn required to convey her shares to Alaska Plastics. Both sides subsequently filed appeals.

I. SHAREHOLDER REMEDIES

In a corporation with publicly traded stock, dissatisfied shareholders can sell their stock on the market, recover their assets, and invest elsewhere. In a close corporation ³ there is not likely to be a ready market for the corporation's shares. The corporation itself, or one of the other individual shareholders of the corporation, who are likely to provide the only market, may not be interested in buying out another shareholder. If they are interested, majority shareholders who control operate policy are in a unique position to "squeeze out" a minority shareholder at an unreasonably low price. ⁴

From a dissatisfied shareholder's point of view, the most successful remedy is likely to be a requirement that the corporation buy his or her shares at their fair value. Ordinarily, there are four ways in which this can occur. First, there may be a provision in the articles of incorporation or by-laws that provide for the purchase of shares by the corporation, contingent upon the occurrence of some event, such as the death of a shareholder or transfer of shares. Second, the shareholder may petition the court for involuntary dissolution of the corporation. Third, upon some significant change in corporate structure, such as a merger, the shareholder may demand a statutory right of appraisal. Finally, in some circumstances, a purchase may be justified as an equitable remedy upon a finding of a breach of a fiduciary duty between directors and shareholders and the corporation or other shareholders.

It does not appear from the record that there is any provision in the articles of incorporation or by-laws which would allow Muir to force Alaska Plastics to purchase her shares. Muir has not suggested that there is such provision, and we, therefore, do not consider the availability of this first method.

As to the second method, Alaska's corporation code provides in AS 10.05.540(2) that a shareholder may bring an action to liquidate the assets of a corporation upon a showing that "the acts of the directors or those in control of the corporation are illegal, oppressive or fraudulent...." A shareholder may also seek liquidation when "corporate assets are being misapplied or wasted." AS 10.05.540(4). Upon a liquidation of assets all creditors and the cost of liquidation must be paid and the remainder distributed among all the shareholders "according to their respective rights and interests." AS 10.05.561. There is no indication whether Muir would have received more or less than the $32,000 price for her shares ordered by the court if Alaska Plastics had been liquidated.

Liquidation is an extreme remedy. In a sense, forced dissolution allows minority shareholders to exercise retaliatory oppression against the majority. Absent compelling circumstances, courts often are reluctant to order involuntary dissolution. E. g., Capitol Toyota v. Gervin, 381 So.2d 1038, 1039 (Miss.1980); Baker v. Commercial Body Builders, Inc., 264 Or. 614, 507 P.2d 387, 395-97 (1973); Browning v. C&C Plywood Corp., 248 Or. 574, 434 P.2d 339, 343 (1967). ⁵ As a result, courts have recognized...