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Sunday, March 30, 2008

APPRAISAL RIGHTS DEEMED NOT SOLE REMEDY WHERE PRIOR BAD ACTS OF CORPORATE PRINCIPALS [FLORIDA]

Under Florida corporate law, minority shareholders of corporations are protected from majority shareholders who engage in undesirable merger, sale, or other major corporate transactions by demanding that their minority shares be purchased for fair value ("appraisal rights"). So as to limit litigation and force use of appraisal rights as a dispute resolution mechanism, such rights are made the exclusive remedy for a disgruntled shareholder, unless proper corporate formalities are not followed or the corporate transaction was "procured as a result of fraud or material misrepresentation." Fla.Stats. Section 607.1302(4)(b).

In a recent Florida case, the majority shareholder transferred corporate assets and liabilities to a new entity to which the minority shareholders were not included as shareholders. There was no fraud or material misrepresentation in regard to the transaction itself. Nonetheless, the minority shareholders sued for relief outside of the appraisal statute, claiming that a prior course of bad actions by the majority shareholder (relating to use of corporate funds to pay personal expenses) was enough "fraud" to allow for a remedy other than appraisal rights.

At first review, this would not seem to be the type of fraud that the appraisal rights statute was addressing, since there was no fraud in the transfer transaction itself. However, drawing upon Delaware corporate decisions under a similar statute, the Florida 1st District Court of Appeals has indicated that the statutory term "fraud or material misrepresentation" includes "unfair dealing." It further found that the majority shareholder's prior actions and overall course of conduct, if proved to be true, could constitute "unfair dealing" and thus allowed the minority shareholders to bring a cause of action outside of appraisal rights.

This expansive reading of the statute does allow for a court to do equity in egregious cases. However, it is unclear in the case how appraisal rights would not provide an adequate remedy (if the court could include in the valuation of the corporation an obligation of the majority shareholder to repay any misappropriated funds). It further effectively voids the public policy of using appraisal rights as an exclusive remedy since the standard of "unfair dealing" opens the door to many likely challenges to the required use of the appraisal rights as the exclusive remedy.

PAUL R. WILLIAMS AND JAMES F. WILLIAMS, JR. ON BEHALF OF BROWN & STANFORD COMPANY, INC., A FLORIDA CORPORATION D/B/A J.C. STANFORD & COMPANY, INC., Appellants, v. JOHN C. STANFORD, JR., AN INDIVIDUAL; VICTORIA B. STANFORD, AN INDIVIDUAL; BROWN & STANFORD COMPANY, INC., A FLORIDA CORPORATION D/B/A J.C. STANFORD & COMPANY, INC.; J. C. STANFORD & SON, INC., A FLORIDA CORPORATION; AND HENDERSON KEASLER LAW FIRM, P.A., A FLORIDA PROFESSIONAL CORPORATION, Appellees. 1st District. Case Nos. 1D06-3701 & 1D06-4808. Opinion filed March 25, 2008.

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