Opinion
No. C3-00-2040.
Filed May 29, 2001.
Appeal from the District Court, Hennepin County, File No. 9618650.
Phillip R. Krass, C. John Jossart, (for appellants)
Ruth S. Marcott, (for respondent)
Considered and decided by Shumaker, Presiding Judge, Randall, Judge, and Peterson, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2000).
UNPUBLISHED OPINION
The district court ordered appellant corporation to repurchase respondent Brian Follett's minority shares of stock and to pay him in installments. After appellate review, the supreme court remanded the action to the district court for a determination of a discount on the shares and a fair installment payment schedule. See Advanced Communication Design, Inc. v. Follett, 615 N.W.2d 285, 2934 (Minn. 2000). In this appeal, the corporation challenges the discount and the installment payment schedule determined by the district court on remand. We affirm.
FACTS
Advanced Communication Design, Inc., d/b/a ACD, Inc. (ACD), sued Brian Follett, its minority shareholder and former employee, for damages for breach of fiduciary duty and other alleged acts of malfeasance. Follett counterclaimed and started a third-party action against ACD's president, alleging that conduct of the corporation and the president had unfairly prejudiced him. Claims were divided for trial between jury and non-jury issues.
A jury found that Follett breached his duty of loyalty and interfered with a contract. After a bench trial on Follett's claims of bad faith and breach of fiduciary duty, the court found that Follett, as a minority shareholder, owed no fiduciary duty to ACD and that certain conduct by ACD's president had unfairly prejudiced Follett. The court ordered ACD and its president to buy out Follett's stock for $475,381, a price that did not include a marketability discount. In a subsequent order, the district court allowed ACD to pay part of the stock price in cash and pay the remainder with a ten-year promissory note. When ACD and its president appealed, Follett also challenged the installment payment order on appeal. We affirmed. See generally Advanced Communication Design, Inc. v. Follett, 601 N.W.2d 707 (Minn.App. 1999).
On review, the supreme court affirmed in part but reversed and remanded to the district court for determinations of a marketability discount on Follett's shares and a fair and equitable installment payment plan:
We remand to the [district] court to determine the appropriate percentage marketability discount. As the majority appraisal report recommended a discount of 55% and the minority appraisal report recommended a discount of 35%, based on this record we direct the [district] court to apply a marketability discount of between 35% and 55% to [Follett's] pro rata share of the value of ACD in accordance with our ruling herein. The purchase price shall be paid in such installments as the [district] court concludes meet the requirements of a fair and equitable buy-out set forth in section 302A.751, subdivision 2.Advanced Communication Design, Inc. v. Follett, 615 N.W.2d 285, 293 (Minn. 2000).
On remand, the district court adopted the share valuation determined by the majority of the appraisal panel but applied the 35% marketability discount recommended by the minority appraiser. The court also denied Follett's request for a lump-sum payment and ACD's request for a return of alleged overpayments. The court modified the installment payment schedule but reaffirmed a ten-year buyout term.
In this appeal, ACD alleges that the district court erred on remand by mixing the majority appraisal with the minority discount and by failing to credit ACD with an overage that resulted from non-discounted payments it made prior to the first appeal.
DECISION I.
"A [district] court's duty on remand is to execute the mandate of the remanding court strictly according to its terms." Duffey v. Duffey, 432 N.W.2d 473, 476 (Minn.App. 1988) (citing Halverson v. Village of Deerwood, 322 N.W.2d 761, 766 (Minn. 1982)). When the order to remand contains no specific directions as to how the district court should proceed, the district court has broad discretion in "handling the course of the cause to proceed in any manner not inconsistent with the remand order." Id. (citing John Wright Assocs., Inc. v. City of Red Wing, 256 Minn. 101, 102, 97 N.W.2d 432, 434 (1959)).
ACD argues that by applying the marketability discount from the minority appraisal report to the valuation of the corporation from the majority appraisal report, the district court failed to achieve a fair and equitable buyout as directed by the supreme court.
The district court has broad discretion in the ultimate determination of the "fair value" of the share to be sold. Advanced Communication Design, Inc. v. Follett, 615 N.W.2d 285, 290 (Minn. 2000) (hereinafter ACD I).
The court shall * * * determine the fair value of the shares taking into account any and all factors the court finds relevant, computed by any method or combination of methods that the court, in its discretion, sees fit to use, whether or not used by the corporation or by a dissenter.
Minn. Stat. § 302A.473, subd. 7 (2000). In determining fair value, a district court may rely on proof of value by any technique that is generally accepted in the relevant financial community, but the overarching concern is that the value must be fair and equitable to all parties. ACD I, 615 N.W.2d at 290.
The majority appraisal report indicated that empirical studies reflect an average marketability discount between 30% and 40%. Although the majority appraisers raised their discount rate to 55% because of certain characteristics of ACD, they did not envision a discount significantly larger than the average discount:
We believe that the characteristics of ACD require a discount slightly higher than the discounts experienced by the majority of stocks studied in the empirical studies. However, since there is no evidence that management has established a pattern of excessive bonuses or other behavior which would suggest that it will take money out against the benefit of the Company shareholders, we cannot envision applying a very large discount. On the other hand, the absence of dividend distributions to shareholders argues that there should likewise be no reduction in the average discount.
The minority appraiser recommended a marketability discount of 35%. The factors he used to derive this discount were the average of the studies concerning marketability discounts, dividend payment, potential buyers, restrictive transfer provisions, voting versus non-voting stock, the size of the company, and the level and trend of earnings.
The district court accepted the 35% marketability rate, noting that 35% was within the average discount applied to these types of buyouts, and rejecting the factors cited in the majority appraisal report for imposing a greater discount. This rate complies fully with the supreme court's remand directive that the district court "apply a marketability discount of between 35% and 55% * * *." Id. at 293.
ACD relies on Genge v. City of Baraboo, 241 N.W.2d 183 (Wis. 1976), for the proposition that a fact-finder cannot "mix and match" the results of separate appraisal reports. Genge is factually and procedurally distinguishable from the present case, and has been superseded by later Wisconsin cases. See Leathem Smith Lodge, Inc. v. State, 288 N.W.2d 808, 814 (Wis. 1980) (stating that "[t]he jury was not obligated to accept both values given by any one witness" in a condemnation case).
Genge involved an action to condemn land at the end of an airport runway. The value of the land taken was before the jury. Both the plaintiff and the defendant offered expert testimony on before-taking and after-taking values. The jury took the difference of the before-value from one witness and the after-value from another witness. The Wisconsin Supreme Court found that the jury's award was higher than the testimony of either witness could support. Genge, 241 N.W.2d at 184-85. Here, the supreme court determined that the evidence supported any marketability discount rate between 35% and 55%. Although the district court was not free on remand to arbitrarily select a rate within those parameters, it supported its selection of the 35% rate with appropriate reasons.
The district court is in the best position to gauge the credibility of witnesses and the relative weight to be given to their testimony. General v. General, 409 N.W.2d 511, 513 (Minn.App. 1987). Further, the court must decide the "fair value and is not required to accept any one party's represented valuation." HMO-W, Inc. v. SSM Health Care Sys., 611 N.W.2d 250, 260 (Wis. 2000); see also Institutional Equip. Interiors, Inc. v. Hughes, 562 N.E.2d 662, 668 (Ill.App.Ct. 1990) (finding that the trial court did not err in rejecting both appraisals of minority shareholder's stock and instead based valuation on adjusted book value, roughly the midway point between the two appraisals).
Given that 35% was a permissible marketability discount in the supreme court's decision, and that the district court explicitly rejected the basis for increasing the marketability discount above the average, the district court did not abuse its discretion in applying the 35% marketability discount to the majority valuation of Follett's shares.
II.
ACD argues that the district court erred in refusing to allow a credit for payments it made before the discount. The result, ACD contends, is that the four previous payments severely impacted the company's ability to function. The district court found this evidence to be lacking in credibility, stating
[t]here is no evidence that any of the payments that ACD has made under the March 8, 1998 order of this court has hurt the company or that ACD could not afford those payments.
Findings of fact will not be set aside unless clearly erroneous. Minn.R.Civ.P. 52.01. ACD essentially asks this court to examine the evidence and make a finding that ACD has been financially damaged by the buyout schedule. See Kucera v. Kucera, 275 Minn. 252, 254, 146 N.W.2d 181, 183 (1966) (it is not within the province of appellate courts to determine fact issues on appeal).
Further, we are not persuaded that the buyout schedule is unfair or inequitable. Although ACD made four payments in contemplation of a higher buyout price, the result is that any overpayment was applied to the reduction of principal. ACD is now paying down a smaller balance. The district court did not abuse its discretion or fail to abide by the remand direction in continuing to require ACD to adhere to the buyout schedule.