194 Conn.App. 690
Conn. App. Ct.2019Background
- R.D. Clark & Sons, Inc. is a closely held S corporation founded in 1984; three siblings (Robert D. Clark’s children) each owned one-third. After their father’s death, Carolyn Manchester assumed his shares.
- James Clark (defendant) was an officer/director until a 2011 falling-out; he resigned in February 2012 and later was sued; he counterclaimed seeking dissolution for alleged illegal/oppressive conduct by the majority.
- The corporation elected under Conn. Gen. Stat. § 33-900 to purchase James’s shares at fair value instead of consenting to dissolution; parties could not agree on value or payment terms, so the court set value and payment terms.
- Trial court initially valued the company and James’s one-third interest, found majority shareholders had acted oppressively (so no minority discount), declined a marketability discount, and awarded statutory attorney’s and expert fees to James.
- The court adjusted accounting treatment for an on-books loan/credit to James, ordered an immediate partial payment and a ten-year amortization with postjudgment interest; corporation appealed on valuation, discounts, accounting, and fee awards; James cross-appealed the court’s refusal to award counsel one-third contingency fee.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Tax-affecting future cash flow in valuing an S-corp | Court should reduce projected cash flow for hypothetical taxes (both experts did so) | Court should not tax-affect because S-corps pass income through and practice of corporate tax-loan/bonus treatment made tax-affecting unsuitable | Trial court did not abuse discretion in declining to tax-affect given mixed authority and the company’s loan/bonus practice |
| Minority discount / oppression & fee entitlement under §33-900(e) | Apply minority discount; no oppressive conduct occurred | Majority treated James differently on long-standing practice (tax assistance), constituting oppression; fees statutory if probable grounds | Trial court’s finding of oppression was supported; no minority discount; James entitled to attorney and expert fees under §33-900(e) |
| Marketability discount | Apply a marketability discount because buyout imposes financial burden on the corporation | No extraordinary circumstances warranting discount; handle burden via payment terms | Court reasonably declined a marketability discount and addressed burden through a ten-year payment plan |
| Accounting for $92,365 loan / $87,635 credit and immediate $87,635 payment | Corporation argued different bookkeeping treatment; challenge to required immediate payment | James sought payment/credit treatment; court sought equitable resolution given irregular books | Court’s mixed treatment (added loan to company value, credited James and reduced his share by credit, ordered immediate payment) was reasonable and not an abuse of discretion |
| Cross-appeal: enforce one-third contingency fee | Enforce retainer: one-third of recovery | Trial court may depart if award would be substantially unfair to paying party | Court properly applied Schoonmaker: found contingency terms reasonable but fee would be substantially unfair (award exceeded lodestar by ~$100k), so reduced fee to reasonable amount; affirmed |
Key Cases Cited
- Pueblo Bancorporation v. Lindoe, Inc., 63 P.3d 353 (Colo. 2003) (distinguishes fair value from fair market value and disfavors minority discounts in corporate buyouts)
- In re Radiology Associates, Inc. Litigation, 611 A.2d 485 (Del. Ch. 1991) (rejects tax-affecting S-corp earnings in discounted cash flow analysis)
- Delaware Open MRI Radiology Assocs., P.A. v. Kessler, 898 A.2d 290 (Del. Ch. 2006) (approves a tailored tax-adjustment approach rather than blanket tax-affecting or ignoring taxes)
- Gross v. Commissioner, 272 F.3d 333 (6th Cir. 2001) (affirming Tax Court approach declining to tax-affect S-corp future earnings)
- Bernier v. Bernier, 873 N.E.2d 216 (Mass. 2007) (approves tax-affecting discussion and contrasts fair value vs. fair market value analysis)
- Balsamides v. Protameen Chemicals, Inc., 734 A.2d 721 (N.J. 1999) (interpreting statutory fair value to exclude minority and marketability discounts)
- Columbia Mgmt. Co. v. Wyss, 765 P.2d 207 (Or. Ct. App. 1988) (supports the view that minority/marketability discounts are often inappropriate in fair-value buyouts)
- Schoonmaker v. Lawrence Brunoli, Inc., 828 A.2d 64 (Conn. 2003) (two-step test permitting departure from contingency fee when necessary to avoid substantial unfairness)
- Siracusa v. Siracusa, 621 A.2d 309 (Conn. App. 1993) (standard that valuation is a fact-specific exercise and trial court’s valuation receives deference)