McMinn v. Mbf Operating Acquisition Corp.

• Decision Date: 27 June 2007
• Docket Number: No. 29,725.,29,725.
• Citation: 2007 NMSC 040,164 P.3d 41
• Parties: Rory A. McMINN, Plaintiff-Petitioner, v. MBF OPERATING ACQUISITION CORPORATION, a New Mexico corporation, Frank L. Sturges, and Mark W. Daniels, Defendants, and MBF Operating, Inc., Defendant-Respondent.
• Court: New Mexico Supreme Court

164 P.3d 41

2007 NMSC 040

Rory A. McMINN, Plaintiff-Petitioner, v. MBF OPERATING ACQUISITION CORPORATION, a New Mexico corporation, Frank L. Sturges, and Mark W. Daniels, Defendants, and MBF Operating, Inc., Defendant-Respondent.

No. 29,725.

Supreme Court of New Mexico.

June 27, 2007.

Sanders, Bruin, Coll & Worley, P.A., Clay H. Paulos, Ian D. McKelvy, Roswell, NM, for Petitioner.

Tucker Law Firm, P.C., Steven L. Tucker, Santa Fe, NM, for Respondent.

OPINION

BOSSON, Justice.

{1} Plaintiff Rory A. McMinn ("McMinn") was a non-controlling shareholder in a closely-held corporation whose interest in the corporation was eliminated by the controlling shareholders through the use of a "freeze out" merger transaction. That transaction involved two steps. First, the controlling shareholders formed a "shell" corporation, an entity set up for the sole purpose of merging with the existing corporation, of which they were the sole directors. Second, the controlling shareholders caused the shell corporation to merge with the existing corporation, with one condition being the "freeze out" of McMinn, the non-controlling shareholder, by the forced cancellation of his shares through a cash purchase. This appeal involves the application of New Mexico's statutes governing fundamental corporate transactions to this merger.

The New Mexico Dissent and Appraisal Statutes

{2} Adopted in 1983, NMSA 1978, § 53-15-3 (1983) gives shareholders who dissent from mergers the right to obtain payment for the fair value of their shares. If the corporation and the dissenting shareholders cannot agree on that value, the statute allows either party to seek a judicial determination of fair value in a court proceeding called an "appraisal." See Smith v. First Alamogordo Bancorp, Inc., 114 N.M. 340, 343, 838 P.2d 494, 497 (Ct.App.1992). The statute does not define "fair value" or the method by which such value is to be calculated. With regard to the appraisal proceeding itself, NMSA 1978, § 53-15-4(E) (1983) simply states that "[a]ll shareholders who are parties to the proceeding shall be entitled to judgment against the corporation for the amount of the fair value of their shares," and the court may appoint one or more appraisers "to receive evidence and recommend a decision on the question of fair value."

{3} The effect of the relevant statutes on the rights of non-controlling shareholders, such as McMinn, who object to a merger is twofold: (1) they eliminate the common law requirement that a merger be unanimously approved and instead require the support of only a majority of shareholders; and (2) in exchange for the dissenting shareholders' loss of their right to veto the transaction, the statutes provide a means for dissenting shareholders to be paid the fair value of their shares. NMSA 1978, § 53-14-3(B) (1983) (providing that majority can approve merger); § 53-15-3 (describing right of dissenting shareholders to obtain payment for their shares).

{4} At issue in this case is the exclusivity provision in Section 53-15-3(D), which states as follows:

A shareholder of a corporation who has a right under this section to obtain payment for his shares shall have no right at law or in equity to attack the validity of the corporate action that gives rise to his right to obtain payment, nor to have the action set aside or rescinded, except when the corporate action is unlawful or fraudulent with regard to the complaining shareholder or to the corporation.

We must determine, as a matter of first impression, whether this exclusivity provision applies to the merger transaction carried out by MBF's controlling shareholders, designed to eliminate the interest of the company's non-controlling shareholder. In making this determination, we inquire into whether the legislature intended the statutory remedy — the determination of fair cash value in an appraisal proceeding — to be the only remedy for non-controlling shareholders in McMinn's position, to the exclusion of other common law claims such as breach of fiduciary duty. We hold that the legislature did not intend an appraisal to be the exclusive remedy under the circumstances of this case. The Court of Appeals having held otherwise, we reverse and affirm the jury verdict below.

BACKGROUND

{5} In 1992, McMinn, Frank L. Sturges ("Sturges"), and Mark W. Daniels ("Daniels") formed MBF Operating Inc. ("MBF"), a New Mexico corporation engaged in the business of pipeline inspection services. The shares of MBF were divided equally between the three shareholders and it was agreed that all three would share in the profits of the company.

{6} In 2001, McMinn was appointed to the state Public Regulation Commission ("PRC") and resigned his employment with MBF due to the potential conflict of interest created by the fact that MBF is regulated by the PRC. However, McMinn retained his shares in MBF, placing the shares in a blind trust ("Trust"), effective April 30, 2001. The three original shareholders had no written shareholders' agreement or buy-out agreement specifying how to deal with a shareholder who ceased to be employed by the company.

{7} After McMinn's resignation, the trustee of his shares ("Trustee") requested that MBF institute a dividend policy so that McMinn could share in the profits now that he was only a passive shareholder, but no such policy was adopted. During the time that McMinn remained a passive shareholder, the Trustee complained that MBF was engaged in oppressive conduct toward McMinn and that Sturges and Daniels were engaged in self-dealing, including payment of excessive salaries to themselves. The Trustee requested that Sturges and Daniels buy out McMinn's interest in MBF and suggested that, if they did not want to make a fair offer for the stock, liquidation of the company might be an alternative. MBF offered to buy out the Trust, but never made an offer more than the liquidation value of the company. The Trust indicated that it may be necessary to force an involuntary dissolution if the oppressive conduct continued and if all MBF offered was liquidation value for McMinn's shares.

{8} In January of 2002, MBF retained Harold Wells ("Wells") to value MBF for the purpose of a merger that would eliminate McMinn's interest in the company. Wells' valuation would provide the basis for the cash amount MBF would pay McMinn for his shares. Wells was not a certified appraiser, had little financial experience, and no accounting background or experience. On March 4, 2002, Wells prepared a report valuing MBF at $300,000. Based on Wells' report, Daniels and Sturges valued MBF and approved a plan of merger designed to force McMinn out of the company. At this time, the Trust was unaware of Wells or the plan of merger being orchestrated.

{9} On March 25, 2002, in lieu of a special meeting, MBF, through Daniels and Sturges, agreed to the "necessity of separating the Corporation and its business affairs" from McMinn and approved the plan of merger. The Trust first learned of the plan of merger four days later. Under the plan, Sturges and Daniels filed Articles of Incorporation on April 17, 2002, forming MBF Acquisition Corp.; Sturges and Daniels were the sole directors and shareholders of the new corporation. Two days later, on April 19, 2002, the new corporation was merged out of existence.

{10} A meeting was held on April 18, 2002, in the office of MBF's counsel in Albuquerque, one week after the Trust received a copy of Wells' evaluation. Sturges and Daniels approved the plan of merger over the objections of the Trustee. Under the plan, McMinn was to receive approximately $134,000 for his entire 1/3 equal share of MBF. The Trustee objected that the plan of merger was unlawful and the valuation deliberately undervalued; the Trust memorialized these objections in a letter to counsel for MBF the following day. The Trust also demanded issuance of shares in the surviving company, but was refused. On April 30, 2002, MBF wrote a letter to McMinn advising that the merger had been approved, that McMinn had made no written demand for payment of fair value, and that McMinn was therefore bound by the terms of the merger. MBF enclosed with this letter a certified check for $134,411.38 for payment of McMinn's shares in accordance with the merger. McMinn rejected the check.

{11} The Trust filed suit against MBF, Sturges, and Daniels, in September of 2002 for breach of fiduciary duty, oppressive conduct, and prima facie tort. McMinn's term on the PRC ended in January of 2003, and he was substituted in as Plaintiff in the case. McMinn's claims were based on conduct that occurred before, during, and after the merger, for which McMinn sought compensatory damages, including lost equity and lost profits of the company, and punitive damages. MBF moved for summary judgment, arguing that Section 53-15-3 provided McMinn's exclusive remedy as a dissenting shareholder, but the judge denied the motion and proceeded to trial.

{12} At trial, McMinn argued that Daniels and Sturges had paid themselves excessive salaries and devalued the company in breach of their fiduciary duties to McMinn and then, through the use of the merger, tried to force McMinn out at an unfairly low price based on his wrongfully devalued shares. MBF countered that it had instituted the merger simply to resolve a stalemate between the parties as to the price MBF would pay McMinn to buy him out. McMinn responded to the contrary that the merger was designed to deprive him of his fair share of the profits of the company in contravention of the shareholders' agreement. MBF was permitted to instruct the jury on the business judgment rule¹ and argue that its actions were lawful and based on a valid business purpose. The jury found that MBF had breached its fiduciary duty to McMinn and awarded McMinn $864,000 in compensatory damages as well as $20,000 in punitive damages against MBF.

{13} MBF appealed and the Court of Appeals reversed the judgment...