5 Cal. App. 5th 1014
Cal. Ct. App.2016Background
- Mark and Karen Goles (36.7% shareholders) were terminated from Katana Software and sued for involuntary dissolution and derivative/fiduciary claims.
- Respondents (holders of a majority) moved under Corporations Code §2000 to buy out the Goles’ shares to avoid dissolution; the court stayed the dissolution and appointed three appraisers.
- Appraisers produced three divergent valuations of the Goles’ interest: $69,000; $150,000; and $200,000.
- The trial court “confirmed” all three reports, averaged them, and set the buyout at $139,666.67; respondents paid and the Goles appealed.
- The Goles argued the appraisals improperly ignored pending derivative claims and two appraisals applied a lack-of-control discount contrary to §2000’s fair-value standard.
- The Court of Appeal reversed, holding the valuation procedure violated §2000 because derivative claims must be considered and lack-of-control discounts are impermissible in this context.
Issues
| Issue | Plaintiff's Argument (Goles) | Defendant's Argument (Respondents) | Held |
|---|---|---|---|
| Whether derivative/ corporate claims must be considered in §2000 fair-value appraisal | Appellate court must account for derivative claims (they are corporate assets that affect fair value) | Trial court may rely on appraisals as submitted; derivative claims are separate | Held for Goles: derivative claims must be considered or the court must allow proof and account for them in valuation |
| Whether lack-of-control discounts are allowable in setting §2000 fair value | Discounts for minority, lack of control undervalue shares where purchaser already controls corporation; §2000 precludes such discounts | Appraisers properly applied market-based discounts | Held for Goles: lack-of-control discounts are impermissible when controlling shareholders buy out a minority under §2000 |
| Whether the trial court could simply confirm/apply an average of three disparate appraisals | Averaging disparate reports that do not reach a majority is unlawful and masks methodological defects | Court could confirm or determine fair value de novo and chose to average | Held for Goles: Court could not confirm all three reports or average them; §2000 allows confirmation only of an award by a majority of appraisers, or else the court must determine fair value consistent with statute |
| Whether the trial court’s result can be sustained despite flawed reasoning if outcome were correct | N/A (Goles) — result incorrect given statutory errors | Respondents invoke rule that correct result should be affirmed despite wrong reasoning | Held against respondents: appellate court cannot salvage the result because record shows valuation omitted required considerations and used improper discounts |
Key Cases Cited
- Cotton v. Expo Power Systems, Inc., 170 Cal.App.4th 1371 (Cal. Ct. App. 2009) (section 2000 requires consideration of derivative claims and proper appraisal process)
- Mart v. Severson, 95 Cal.App.4th 521 (Cal. Ct. App. 2002) (standard of review for fair-value factual findings)
- Grosset v. Wenaas, 42 Cal.4th 1100 (Cal. 2008) (derivative claims accrue to the corporation and must be viewed as corporate assets)
- Brown v. Allied Corrugated Box Co., 91 Cal.App.3d 477 (Cal. Ct. App. 1979) (lack-of-control discounts inappropriate when purchaser already controls corporation)
- Dickson v. Rehmke, 164 Cal.App.4th 469 (Cal. Ct. App. 2008) (trial court may reject appraisals and decide de novo but must comply with statutory scheme)
- Kennedy v. Kennedy, 235 Cal.App.4th 1474 (Cal. Ct. App. 2015) (procedural requirements for derivative claims where dismissal or valuation affects corporate recovery)
- Steinberg v. Amplica, Inc., 42 Cal.3d 1198 (Cal. 1986) (fraud and fiduciary breach must be considered in valuation contexts)