Mart v. Severson
| Decision Date | 23 January 2002 |
| Docket Number | No. A095456.,A095456. |
| Citation | 95 Cal.App.4th 521,115 Cal.Rptr.2d 717 |
| Court | California Court of Appeals Court of Appeals |
| Parties | Bradley C. MART, Plaintiff and Appellant, v. Leland SEVERSON, Defendant and Respondent. |
Bradley C. Mart (Mart) and Leland Severson (Severson) are the sole shareholders of Bay World Trading Ltd. (Bay World). Mart appeals from a decree which provides that Bay World will be dissolved unless Bay World and/or Severson elect to buy-out Mart's shares in the corporation. Mart argues that the superior court's determination of the "fair value" of his Bay World shares was erroneous as a matter of law. We agree and, therefore, reverse the trial court's order.
This appeal is from a special proceeding conducted pursuant to section 2000 of the Corporations Code 1 and is expressly authorized by that statute. (§ 2000, subd. (c).) Therefore, we begin by reviewing the statutory procedure.
The present case involves a voluntary dissolution proceeding. Shareholders of a corporation who represent 50 percent or more of the voting power may elect to wind up and dissolve that corporation by initiating a voluntary dissolution proceeding. (§§ 1900-1903.) The special proceeding established by section 2000 "enable[s] a 50 percent shareholder to avoid dissolution of the corporation by purchasing the stock of the shareholder(s) seeking to dissolve the corporation." (Abrams v. Abrams-Rubaloff & Associates (1980) 114 Cal.App.3d 240, 247, 170 Cal.Rptr. 656 (Abrams).) This procedure, which also applies in involuntary proceedings, reflects the Legislature's "interest [in] preserving the corporate enterprise as a going concern if desired by the majority or by the other 50% owners" and is intended to be a "meaningful alternative to termination of the enterprise." (Legis. Com. com., 23E West's Annotated Corp.Code, § 2000 (1990 ed.) pp. 514 & 516-517.)
Section 2000 states that, when a voluntary proceeding has been initiated by the vote of shareholders representing only 50 percent of the voting power (the moving parties), the corporation or the holders of the other 50 percent of the voting power (the purchasing parties) "may avoid the dissolution of the corporation and the appointment of any receiver by purchasing for cash the shares owned by the [moving parties] at their fair value." (§ 2000, subd. (a).)
"Fair value" is defined in section 2000 as "the liquidation value as of the valuation date2 but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation." (§ 2000, subd. (a).) In other words, section 2000 expressly requires that the going concern value of the corporation be reflected in the fair value price. The reason for this requirement is that "a liquidation does not necessarily contemplate that the assets will be sold piecemeal and the goodwill of the business sacrificed by a termination of the business." (Marsh, et al, Cal. Corporation Law (4th ed. 2001 Supp.) vol. 2, § 21.08[C] p. 21-45.) It may be possible to sell the entire business as a going concern in liquidation. "If that is true, then the moving parties should be entitled to a value which takes into account that possibility since such a sale of the entire business as a going concern could be made in the liquidation if the dissolution were permitted to proceed." (Ibid.)
Anticipating that opposing parties in a dissolution proceeding may not agree as to the "fair value" of the moving parties' shares, the Legislature established a procedure for determining that fair value. If the purchasing parties elect to purchase the shares of the moving parties but the parties cannot agree upon the fair value of those shares, the purchasing parties may apply to the superior court to stay the dissolution proceeding and "ascertain and fix the fair value of the shares owned by the moving parties." (§ 2000, subd. (b).) In such an event, the court (§ 2000, subd. (c).)
The court must then "enter a decree which shall provide in the alternative for winding up and dissolution of the corporation unless payment is made for the shares within the time specified by the decree." (§ 2000, subd. (c).) "If the purchasing parties desire to prevent the winding up and dissolution, they shall pay to the moving parties the value of their shares ascertained and decreed" within the time specified in the decree or fixed on appeal. Upon receiving such payment, "the moving parties shall transfer their shares to the purchasing parties." (§ 2000, subd. (d).) In other words, once the fair value is set pursuant to section 2000, the purchasing parties have the right, but no corresponding obligation, to purchase the moving parties' shares at the fair value price. (§ 2000, subd. (d).)
With this statutory framework in mind, we turn to the facts which led to this appeal.
Bay World is a California corporation that sells and exports meat and meat byproducts. Mart and Severson are each 50% shareholders and are both directors of the corporation.
On February 24, 2000, Mart signed a "Written Consent of Shareholders to the Election to Wind Up and Dissolve" Bay World. Mart delivered this written consent to Severson the following day at a meeting of Bay World's board of directors. That same day, Severson gave Mart notice of his intent to sue Mart for breach of fiduciary duty because Mart was allegedly attempting to establish a business that would compete with Bay World.3
On February 28, 2000, Mart filed a petition in the superior court pursuant to section 1904 requesting court supervision of the voluntary winding up of Bay World. According to the petition, court supervision was necessary because the shareholders were "divided into factions and the board of directors [was] deadlocked with regard to management and direction of the corporation." The directors could not agree on a plan of dissolution or liquidation and internal dissention threatened to substantially delay completion of the dissolution process absent court assistance.
On March 16, 2000, Severson exercised his right under section 2000 to have Bay World purchase Mart's shares at their "fair value" in order to avoid corporate dissolution. On April 6, 2000, the Honorable Ronald Quidachay stayed dissolution of Bay World and initiated the process of selecting a panel of three disinterested appraisers to value Mart's shares.4 Thereafter, the court appointed one appraiser selected by Mart and one selected by Severson and then ordered those two to select a third who was then confirmed by the court. The three appraisers, KPMG Consulting, LLC, Sierra Capital Advisors, LLC, and Law and Economics Consulting Group, LLC, submitted a joint report dated November 30, 2000 (November 30 report). According to the November 30 report, the appraisers worked together to determine the fair value of Bay World, all understood their study was being made pursuant to section 2000 of the Corporations Code, and the opinions expressed in the report were the consensus opinions of all three appraisers.
The appraisers defined fair value as it is defined in section 2000, i.e., "[t]he liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation." The appraisers expressly stated that "we believe the Company would be sold as a going concern." Therefore, they concluded that a "cost approach" valuation method, which focuses exclusively on the assets and liabilities of the corporation, was not applicable. Instead, the appraisers employed two alternate valuation methods, the "income approach" and the "market approach" because these approaches "provide a more realistic indication of what [Bay World] would be sold for as a going concern...." The November 30 report sets forth the following ultimate conclusion: "Based on our analysis, which relied in part on information and data supplied by the Company, our conclusion of the fair value of 100 percent of the common stock of Bay World ... as of February 25, 2000 is: [¶] $5.6 MILLION DOLLARS [¶] $5,600,000."
On December 5, 2000, Severson filed a motion to remand the November 30 report. Severson argued the appraisers' valuation methods were erroneous because they resulted in a calculation of Bay World's fair market sale value rather than its liquidation value as required by California law. A hearing on Severson's motion was held on January 4, 2001, before the Honorable A. James Robertson. Initially, the court expressed the opinion that the appraisers' analysis was proper. However, Severson's counsel maintained that the report was ambiguous as to whether the appraisers had calculated a liquidation value. Ultimately, the court decided to request clarification from the appraisers.
On January 9, 2001, the court filed an order instructing the appraisers to submit a supplemental letter further explaining their November 30 valuation of Bay World. The order inquired whether the appraisers calculated the liquidation value of Bay World or its sale value as a going concern in liquidation. The term "liquidation value" was not defined in the order. The order set forth several additional...
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