may not be cited except as provided by
Minn. Stat. §480A.08, subd. 3 (1998).
STATE OF MINNESOTA
IN COURT OF APPEALS
Daniel W. Wigart, et al.,
Rudy A. Mazzochi, et. al.,
Robert F. Cervenka, et al.,
Filed April 27, 1999
Affirmed in part, reversed in part
Ramsey County District Court
File No. C698289
Thomas R. Sheran, Jerrie M. Hayes, Moss & Barnett, 4800 Norwest Center, 90 South Seventh Street, Minneapolis, MN 55402-4129 (for respondents)
Considered and decided by Toussaint, Presiding Judge, Anderson, Judge, and Holtan, Judge.
Minority shareholders in a privately-held corporation, one of whom is also a director, appeal from a final judgment of the district court denying their motion to compel a stock buy-out pursuant to Minn. Stat. § 302A.751, subd. 2 (1998). By notice of review, the majority shareholder and four of the corporation's directors challenge the district court's denial of summary judgment on their assertion that the minority shareholders lack standing to compel a buy-out. We affirm the district court's grant of summary judgment against the minority shareholders and reverse its denial of summary judgment for the majority shareholder and four directors.
Appellants are minority shareholders of MICROVENA Corporation. MICROVENA is a privately-held corporation in the business of developing, manufacturing, and selling medical implant devices. Appellant Daniel Wigart and respondent Phillips Plastics Corporation (Phillips) were among those who founded the corporation in 1989. Rudy Mazzocchi was MICROVENA's president and CEO until the winter of 1998.
Phillips is a Wisconsin corporation in the business of injection molding of plastic parts used in the automotive and appliance industries. Phillips owns 66% of MICROVENA's stock. Pursuant to the corporation's bylaws, Phillips has authority to appoint and to remove at will five of the seven MICROVENA board of directors members. Respondent Robert Cervenka is Phillips's CEO and majority shareholder, as well as a MICROVENA director.
Initially, Phillips invested a little over $3,000,000 in MICROVENA. By 1997, however, Phillips had invested over $14,000,000 to cover MICROVENA's operating losses. Recognizing that MICROVENA's management was willing to accept MICROVENA's losses indefinitely, Phillips decided to divest itself of its equity in the company. With that goal in mind, it began looking into the possibility of a strategic sale or an initial public offering (IPO). Because of uncertainties in the market for medical technology offerings, however, Phillips's efforts to find a new buyer or generate interest in an IPO proved unsuccessful. In the fall of 1997, Phillips decided an IPO was not in MICROVENA's best interests because of low valuations of the company.
By February 1998, Phillips had concluded that MICROVENA's management's willingness to operate the corporation at a loss indefinitely was not in the corporation's or the shareholders' best interests. Phillips therefore directed Mazzocchi to focus on profitability. Mazzocchi opposed Phillips's directive on the belief that it would delay the growth Mazzocchi deemed essential to MICROVENA's mission. In the face of Mazzocchi's opposition, Phillips exercised its right under the bylaws to replace five of the existing MICROVENA directors. The new board, led by Cervenka, placed Mazzocchi on paid leave, created a chief operating officer (COO) position to oversee MICROVENA's day-to-day activities, and appointed Joel Hixson to that position.
The new board also offered to repurchase at $116.85 per share the stock of departing employees who had acquired their shares through MICROVENA's employee bonus and stock purchase plans, using a pricing scheme comparable to that used for the repurchase offer. MICROVENA did not extend this offer to non-departing employees or to shareholders who had not acquired their stock through the employee bonus or the stock purchase plans. The stock repurchase rights of these shareholders were governed by the stock restriction agreement, under which they were entitled to sell their stock to MICROVENA at two and one-half times the book value of their original shares, regardless of their actual appraised value.
The $116.85 per share value MICROVENA used in the repurchase offer resulted from a valuation report issued in 1997. The MICROVENA board of directors adopted the $116.85 figure while Wigart and Mazzocchi served on the board. Although subsequent valuation reports suggested a much higher per share value, Phillips and MICROVENA insisted on using the $116.85 per share value in repurchasing the stock of departing employees.
Because of what they perceived to be oppressive conduct, the minority shareholders brought an action against Phillips and the Phillips-appointed directors, seeking to compel a buy-out of their shares at a fair value and to recover damages for breach of statutory and fiduciary duties. In March 1998, they moved to compel a buy-out. Shortly after, Phillips moved to dismiss or, in the alternative, for summary judgment on grounds that the minority shareholders lacked standing to compel a buy-out under Minn. Stat. § 302A.751, subd. 2.
The district court denied the minority shareholders' motion and directed entry of a final judgment as to the buy-out claim pursuant to Minn. R. Civ. P. 54.02. The court found that the majority shareholder had not acted in an "unfairly prejudicial" manner to the minority shareholders as required by Minn. Stat. § 302A.751, subd. 2. The court also denied the majority shareholder's contemporaneous motion to dismiss or for summary judgment, on a finding that fact issues remained as to whether the $116.85 per share value was fair and whether MICROVENA's refusal to redeem the minority shareholders' shares at $116.85 per share had caused appellants to incur damages. This appeal followed.
On appeal, the minority shareholders claim the district court abused its discretion in concluding that Phillips's conduct did not unfairly prejudice them in their capacity as shareholders. Specifically, they argue that Phillips unfairly prejudiced them by (a) arbitrarily changing the composition of the MICROVENA board; (b) dictating a change in the direction of MICROVENA that focused on profitability and required Mazzocchi to cut costs and operating expenses; (c) failing to conclude a strategic sale or an IPO; (d) suspending Mazzocchi while it investigated issues related to his management of MICROVENA and subsequently replacing him with a new COO; and (e) refusing to purchase appellants' MICROVENA stock at $116.85 per share, while at the same time purchasing the stock of other minority stockholders at that price. This allegedly unfair prejudicial conduct, in their view, justified a court-ordered buy-out. We disagree.
Under Minnesota law,
[a] court may grant any equitable relief it deems just and reasonable in the circumstances * * *:
* * * *
(b) In an action by a shareholder when it is established that:
* * * *
(3) the directors or those in control of the corporation have acted in a manner unfairly prejudicial toward one or more of the shareholders in their capacities as shareholders or directors of a corporation that is not a publicly held corporation, or as officers or employees of a closely held corporation.
Minn. Stat. § 302A.751, subd. 1(b)(3) (1998) (emphasis added). In an action under subdivision 1(b)(3), the court may order a corporation to buy the shareholders' shares if it determines in its discretion that such an order would be "fair and equitable to all parties under all of the circumstances of the case." Minn. Stat. § 302A.751, subd. 2 (1998).
The district court determined that Phillips had not acted in a manner unfairly prejudicial to the minority shareholders. Instead, it found a philosophical difference in corporate governance that did not rise to the level of unfairly prejudicial conduct. The record supports the district court's findings and conclusion.
First, Phillips's decision to replace five of the seven MICROVENA board members was a legitimate exercise of Phillips's authority under the corporation's bylaws. As such, it was not unfairly prejudicial. Cf. Burgmeier v. Farm Credit Bank, 499 N.W.2d 43, 50 (Minn. App. 1993) (stating that party to an agreement "does not act in bad faith by asserting or enforcing its legal and contractual rights"), review denied (Minn. July 15, 1993).
Second, Phillips acted in furtherance of MICROVENA's legitimate business objectives when it directed Mazzocchi to focus on profitability and cut operating expenses. Phillips's decision to change the direction of the corporation was motivated by its desire to make MICROVENA profitable. Its sole purpose was to institute sound management and prudent business practices. A majority stockholder's refusal to stand by and passively watch the corporation lose money cannot reasonably be said to be unfairly prejudicial.
Third, Phillips did not deliberately truncate MICROVENA's efforts to negotiate a sale or an IPO. Phillips's failure to attract a buyer or generate interest in a public offering resulted from circumstances beyond Phillips's control, including MICROVENA's poor performance, managerial problems, and market niche. Phillips's actions with respect to a potential sale or an IPO, therefore, were not unfairly prejudicial.
The same is true of Phillips's decision to change Mazzocchi's duties, place him on leave, hire a new COO, and terminate key employees. These decisions served no purpose other than a legitimate business purpose. Given Mazzocchi's opposition to Phillips's desire to focus on profitability, Phillips believed it could not have turned the corporation around with Mazzocchi at the helm. Absent evidence of a discriminatory or otherwise improper motive, the record does not support a finding that Phillips's actions with respect to Mazzocchi were unduly prejudicial to appellants.
Finally, MICROVENA's refusal to buy appellants' shares at $116.85 per share did not unfairly discriminate against appellants. MICROVENA's repurchase offer was limited to departing employees who were not original shareholders and who had acquired their shares in reliance on management's valuation of the stock at $116.85 per share. Appellants did not qualify for this offer because they were neither departing employees nor employees who had purchased their shares in reliance on the $116.85 figure. Moreover, appellants' stock repurchase rights were governed by the stock restriction agreement, under which appellants were entitled only to two and one-half times the book value of their original shares, regardless of their actual value. Appellants do not claim that they entered into the stock restriction agreement involuntarily or that its terms are unfair. Hence, MICROVENA's refusal to redeem appellants' shares at the $116.85 per share price it offered other minority shareholders was not unfairly prejudicial to appellants.
Because the record supports the district court's conclusion that Phillips's conduct did not unfairly prejudice appellants, we conclude the district court did not abuse its discretion in denying appellants' motion for a court-ordered buy-out.
Phillips and the directors Phillips appointed to the MICROVENA board moved for summary judgment that appellants lacked standing to request a court-ordered buy-out under Minn. Stat. § 302A.751, subd. 2. The district court denied the motion without reaching the standing issue, reasoning instead that issues of material fact remained as to whether (a) the $116.85 per share price was a fair value, and (b) respondents' refusal to redeem appellants' shares at that price caused appellants to incur damages.
On review, respondents claim that whether the $116.85 repurchase price represents a fair value is immaterial, because respondents owed no fiduciary duty to the minority shareholders with respect to the pricing of the stock or any repurchase offers MICROVENA extended to its minority shareholders. We agree.
Count IV of the complaint alleges that respondents breached the fiduciary duties they owed as directors and majority shareholders to appellants. As directors of MICROVENA, respondents had a fiduciary duty to
discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.
Minn. Stat. § 302A.251, subd. 1 (1998). As shareholders, respondents had a fiduciary duty to treat each other according to the highest standards of integrity and good faith. Minn. Stat. § 302A.751, subd. 3(a) (1998); Wessin v. Archives Corp., 581 N.W.2d 380, 385 (Minn. App. 1998), review granted (Minn. Sept. 30, 1998). The undisputed facts in the record do not establish that respondents failed to act according to the highest standards of integrity and good faith.
First, respondents played no role in the valuation of the stock or its pricing. The $116.85 per share price was based on a valuation report conducted by an outside company, and was approved by MICROVENA's management before Phillips changed the composition of the board of directors. Similarly, the decision to repurchase the stock of minority shareholders other than appellants was a corporate decision in which Wigart participated. Even if it was respondents' decision, it was grounded on legitimate business reasons and did not unfairly discriminate against appellants, who had acquired their stock under completely different circumstances and whose repurchase rights were governed by the stock restriction agreement. The fact that appellants disagreed with the $116.85 per share value or management's decision not to repurchase their stock does not mean that respondents acted in bad faith or against the best interests of the corporation and the shareholders. Because the record does not support a finding that respondents breached a fiduciary duty as a matter of law, the district court erred in denying respondents summary judgment on Count IV of the complaint.
Count II of the complaint also fails as a matter of law. Count II alleges that respondents excluded or limited the rights of MICROVENA's shareholders in violation of Minn. Stat. § 302A.471, subd. 1(a)(4) (1998). This statutory provision applies only when a corporation amends the articles of incorporation in a manner that adversely affects the rights of dissenting shareholders by excluding or limiting their right to vote. Appellants concede that the corporation did not actually amend any of the articles of incorporation, but allege that respondents constructively amended MICROVENA's articles to deprive them of meaningful participation in decisions affecting the corporation. The record contains no evidence that respondents excluded or limited appellants' right to vote as required for relief under Minn. Stat. § 302A.471, subd. 1(a)(4). Summary judgment on count II is therefore appropriate.
Affirmed in part, reversed in part.
[*] Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. Art. VI, § 10.
 The business judgment rule is implicated and appellants have not overcome the presumption of validity of the officers' and directors' actions. See Black v. NuAire, Inc., 426 N.W.2d 203, 210 (Minn. App. 1988) (noting that courts seldom interfere with decisions made on basis of directors' business judgment), review denied (Minn. Aug. 24, 1988).