The Minnesota Court of Appeals recently released an unpublished decision that once again reminds us of just how high the stakes can be in shareholder lawsuits. In McGrath v. MICO, Inc., Nos. A11-1087, A11-1109, A12-0093, 2012 WL 6097116 (Minn. Ct. App. Dec. 10, 2012) (“McGrath”), the Appeals Court upheld a lower court judgment that, among other things, awarded over $8.5 million in punitive damages and over $3 million in attorney's fees, costs and disbursements to the disgruntled shareholder in an alleged shareholder squeeze-out scenario.
In McGrath, Daniel McGrath (“Dan”) and his brother Brent each inherited 50% of the voting stock in a company founded by their parents called MICO, Inc. The company designs, manufactures and sells hydraulic components and brake systems for heavy-duty off-road vehicles and equipment. Brent was president of the company and Dan was executive vice president. Two brothers named Larry (a half-brother) and Mark also had non-voting stock in the company. After their father's death in 2004, Brent hired a friend named Glenn Gabriel (“Gabriel”). Dan eventually sued the company, Brent and others asserting various causes of action and seeking a court-ordered buy-out of his stock.
Following a trial, the district court found that Brent, Gabriel, Larry and others apparently engaged in a series of conduct “motivated by a desire to force Dan to leave MICO and/or sell his shares cheaply.” Their conduct included unjustifiably demoting Dan, limiting his responsibilities and making Dan report to Gabriel. Brent and others ignored Dan's overtures for dialogue, involuntarily placed him on a leave of absence for no clear reason, excluded him from Board decision making, shorted him on distributions needed for taxes and engaged in conduct that was humiliating and insulting to Dan. They also retaliated against Dan for seeking redress.
In Dan's lawsuit, in addition to seeking a court-ordered buy-out pursuant to Minn. Stat. 302A.751, he asserted tort causes of action including breach of fiduciary duty, tortious interference, a whistleblower claim and a claim for unpaid wages.
Following a trial regarding liability, a jury reached a verdict on the tort counts, and awarded damages in favor of Dan against MICO, Brent and Larry. Dan was awarded $275,402.00 for “loss of bonus income”; $52,847.00 for “loss of profit sharing”; $1,250,000.00 for “loss of management participation rights; $639,516.00 for “future wage loss”; and a total of $4,897,000.00 in punitive damages against Brent, Larry and MICO.
Furthermore, the trial court ruled that MICO would have to purchase Dan's shares and gave the parties time to reach an agreement. If the parties could not agree on a purchase price, the trial court scheduled a later trial to ascertain a fair value for the buy-out.
When the parties could not reach an agreement, following the valuation trial, the trial court ordered MICO to purchase Dan's shares for $11,503,000.00. It also awarded attorney's fees against MICO, Brent and Larry of $2,515,508.25 for the first liability phase of the trial, and $320,000.00 for the valuation phase of the trial, among other things.
In Minnesota, shareholders in closely held companies have a fiduciary duty to each other. Shareholders owe each other the “highest standard of integrity and good faith in their dealings with each other,” and require each shareholder to deal “openly, honestly and fairly with other shareholders.” Pedro v. Pedro, 489 N.W.2d 789, 802 (Minn. Ct. App. 1992). As reflected in the McGrath case, breach of this duty can have grave consequences.
In the McGrath decision, the most reasonable thing for the parties to have done was to negotiate a fair value buy-out of Dan McGrath's shares when he first offered in 2004 or in settlement of the claims. In failing to treat Dan fairly and ignoring his offer of a buy-out, the company and its other shareholders were eventually forced to pay well over double the actual value of the stock following a trial not including the attorney's fees incurred in having three large law firms involved in the defense.
If you or your company is dealing with shareholder discord, it is imperative that you get (and follow) good advice before you make emotional or rash decisions. Of the many emails considered by the court and jury in the McGrath case, none drives home this point more than the email from Larry to Brent after they had received a letter from Dan's attorney:
“I want Dan terminated!!!!!!!!!!!!!!!!!!… Forget [defense counsel] Dayle [Nolan] and the lawyer talk about what Dan can potentially do. Let him deal with the legal issues and we move on and fire/terminate him and let a judge, if needed, make the decision . . . .”
At this point, the consequence of Larry's suggested course of action speaks for itself.