Appeal from Superior Court of Whatcom County. Docket No: 93-2-02129-8. Date filed: 02/24/95. Judge signing: Hon. David S. Nichols.
Authored by Walter E. Webster. Concurring: H. Joseph Coleman, William W. Baker.
The opinion of the court was delivered by: Webster
WEBSTER, J. -- In this case, we must decide whether to apply a marketability discount when computing the fair value of a minority shareholder's interest, after the majority shareholder froze the minority out of a close corporation. The Kaufmans argue that a marketability discount is appropriate because it reflects the difficulty inherent in selling close corporation stock. Nevertheless, "fair value" means the shares' value at the moment just before the majority committed misconduct.
The valuation appropriately reflects the then existing intention of the minority to continue as a participating shareholder. And it should fully compensate the shareholder forced out, and avoid giving a windfall to the party committing misconduct. Consequently, we affirm the trial court's refusal to apply a marketability discount. But because the trial court had to use discretion in determining the fair value of the minority's interest, we reverse the trial court's award of prejudgment interest.
Because they had complementary skills, Stewart Prentiss and Michael Kaufman formed WesSpur, Inc. in 1989. That corporation focused on selling and servicing arborculture equipment. Prentiss received 49% of the stock and handled sales. Kaufman, who managed catalog distribution, the office, and handled warranty and service obligations, received 51%. Although Prentiss devoted his complete efforts to WesSpur and Kaufman had periods during which he pursued other activities, they received identical salaries and benefits. And the corporation's sales flourished, growing from $225,000 in 1989 to $1.25 million in 1992.
Despite business success, Kaufman and Prentiss disagreed over several issues. For example, with company funds, Kaufman booked a trip to Alaska for a convention at which he and Prentiss thought their company should be represented. But Kaufman never attended the convention, and took a month vacation before returning to Washington. Also, when Kaufman purchased a new truck over Prentiss's objections, he took title personally even though the corporation paid for it. Later that year, when a new accounting system crashed, ruining important data, Kaufman blamed Prentiss for upsetting the company's bookkeeper during the efforts to reinstall the program.
By summer 1993, Kaufman decided to preclude Prentiss from further involvement with WesSpur. He told Prentiss that he was fired, demanded that he surrender his keys, changed the locks, and called a special shareholders meeting. At that meeting, Kaufman voted his 51% interest to add a third director and to permit removal of an officer without cause.
Given his majority position, his motion passed. He then made his wife the third director and removed Prentiss from his role as a corporate officer.
Later, Prentiss resigned as a director, perceiving his participation to be useless.
In December 1993, Prentiss sued Kaufman, his wife, and WesSpur, Inc. to recover the fair value of his shares, and for intentional infliction of emotional distress. The Kaufmans counterclaimed for interference with business expectancy. The court appointed a receiver to attempt to sell all shares of WesSpur. But facing a variety of thinly veiled threats of competition and eviction from the premises, and given the employees' loyalty to Kaufman, the receiver decided that he could only sell the company to Kaufman. Kaufman agreed to pay $95,000, an amount the court approved. Prentiss, perhaps anxious to receive some money immediately, agreed to take a 45% minority discount on his share of the proceeds provided that the discount amount be deposited in an account earmarked to pay any damages that Kaufman might owe him in the continuing legal action.
The purchase price and discount amount was admissible into evidence, but the parties stipulated that it would not be binding on the court or any party as to the company's value or the appropriateness of a minority discount.
The court bifurcated Prentiss's suit for fair value from the parties' respective tort claims. Although the bench trial addressing the fair value of Prentiss's ownership interest has not been transcribed, the parties designated the exhibits. Richard Anda, one expert whose report the court admitted, valued WesSpur at $336,863. *fn1 He calculated Prentiss's share to be $165,000, and, applying a 28% minority discount, concluded that the court should award Prentiss $118,800. Anda's report does not discuss a marketability discount. Kaufman's expert, the Business Exchange Center, valued WesSpur using four different methods. Based on the range of those values, it opined that the company's fair market value was $197,483. *fn2 In a separate statement (although attached as part of the same exhibit), the BEC went on to discuss "valuation of minority discount." Without allocating specific percentages, BEC recommended discounting Prentiss's interest by 45% because he was a minority shareholder and because the stock would be difficult to market. *fn3
The court's findings and Conclusions declared that Kaufman had frozen Prentiss out of WesSpur, making the latter equivalent to a Dissenting shareholder, and entitling him to "the fair value of his shares as of the date" he was excluded. *fn4 The court adopted BEC's fair market value of $197,483, computing Prentiss's 49% to be worth $96,766.67. And in a handwritten addition to Prentiss's proposed findings, it decided that "under these circumstances, neither a minority shareholder discount nor a discount for lack ...