931 N.W.2d 211
N.D.2019Background
- Four brothers were original shareholders of Smithberg Brothers, Inc.; after one brother (Craig) died, James acquired Craig’s shares so ownership became: James 50%, Gary 26%, Ronald 24%.
- Ronald disputed corporate management and compensation practices, claiming James and Gary received substantial salary, bonuses, and benefits while Ronald received none after 2012; he alleges attempts to freeze him out and breach of an early buyout agreement.
- Ronald sued seeking damages under 13 theories (nine statutory claims under the Business Corporation Act and four tort/contract/equitable claims) and sought an order requiring the corporation or remaining shareholders to purchase his shares at fair value under the Corporate Farming Law (N.D.C.C. § 10-06.1-26).
- Defendants moved for summary judgment arguing the Corporate Farming Law provides the sole remedy for minority shareholders and, alternatively, that Ronald failed to raise genuine issues of material fact on the statutory and other claims; the district court granted summary judgment dismissing all damage claims.
- The district court held a bench trial on valuation, selected June 10, 2016 (the commencement date) as valuation date, adopted the defendants’ expert valuation of Ronald’s 24% interest at $169,985, and ordered purchase within 12 months or dissolution.
- The Supreme Court reversed: it found genuine issues of material fact exist on Ronald’s claims (including potential derivative claims), rejected the view that the Corporate Farming Law entirely bars Business Corporation Act claims, and reversed the valuation because derivative claims could affect corporate value.
Issues
| Issue | Smithberg (Plaintiff) Argument | Defendants' Argument | Held |
|---|---|---|---|
| Whether N.D.C.C. § 10-06.1-26 (Corporate Farming Law) precludes statutory claims under the Business Corporation Act | Section 10-06.1-26 does not abrogate or conflict with Business Corporation Act remedies | Corporate Farming Law provides the sole remedy for minority shareholders of farming corporations | Reversed district court; no irreconcilable conflict found and statutory claims not barred as a matter of law |
| Whether Ronald raised genuine issues of material fact to survive summary judgment on statutory, tort, contract, and equitable claims | Evidence of corporate informality, excessive compensation/benefits to James and Gary, removal from office, and breach of buyout agreement raises disputed facts | Ronald offered only conclusory allegations (defendants’ contention) | Court held Ronald did raise genuine issues of material fact; summary judgment dismissal of all 13 claims was erroneous |
| Whether Ronald’s claims are direct or derivative (and thus how they must be pursued) | Some claims may allege distinct injury to Ronald allowing direct actions; others may be derivative for corporate injury | Many claims allege injury to the corporation and should be brought derivatively | Court remanded for district court to determine whether claims are direct or derivative; derivative claims may affect remedies and valuation |
| Whether valuation of Ronald’s shares was proper (date and amount) | Equity and facts support an earlier valuation date (Dec. 31, 2011) and challenge expert discounts/IRS valuation method used by defendants’ expert | Use commencement date (June 10, 2016); expert used IRS gift-tax valuation methods and minority discount supporting $169,985 figure | Valuation reversed because unresolved derivative claims may change corporate value; court had not abused discretion choosing June 10, 2016 as valuation date and district court’s valuation methodology was not clearly erroneous on the record presented |
Key Cases Cited
- Cuozzo v. State, 925 N.W.2d 752 (standard for reviewing summary judgment and viewing evidence in favor of nonmoving party)
- Schumacher v. Schumacher, 469 N.W.2d 793 (minority shareholder direct-action exception in closely held corporations)
- Danuser v. IDA Mktg. Corp., 838 N.W.2d 488 (nature and effect of derivative actions)
- Junker v. Crory, 650 F.2d 1349 (derivative action recovery benefits corporation)
- Fisher v. Fisher, 568 N.W.2d 728 (minority-share discount not to be automatically applied when determining fair value)
- Puklich v. Puklich, 930 N.W.2d 593 (appellate review standards for valuation findings)