Opinion
No. X05 CV 09 5013295S
May 31, 2011
MEMORANDUM OF DECISION ON DEFENDANT'S MOTION TO STRIKE (#144)
Introduction
The plaintiff group of minority shareholders have brought this action seeking judicial dissolution of a closely held corporation under General Statutes § 33-896 et seq. The plaintiff's claim that the current management of Gibbs Wire Steel Company, Inc. (the Company) has acted in a manner that is oppressive to its shareholders. The plaintiffs seek a pro rata distribution of their respective interest (approximately 40%) in the Company upon dissolution. In a previous memorandum of decision (#132), the court denied the defendant's motion to dismiss for lack of subject matter jurisdiction. Having failed to persuade the court of the strength of its prior jurisdictional arguments, comes now the defendant Company with a motion to strike the plaintiffs' complaint on the grounds that it fails to state a claim for oppression of the minority shareholders. The motion to strike is also denied for the reasons set forth herein.
Section 33-896 provides in relevant part: "The superior court for the judicial district where the corporation's principal office . . . is located may dissolve a corporation: (1) In a proceeding by a shareholder if it is established that: (A) The directors or those in control of the corporation have acted, are acting or will act in a manner that is illegal, oppressive or fraudulent; or (B) the corporate assets are being misapplied or wasted." The statute was amended effective October 1, 2009, after the commencement of this action. See Public Acts 2009, No. 09-55.
Motion to Strike — Legal Standard
"The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498, 815 A.2d 1188 (2003). "It is fundamental that in determining the sufficiency of a [pleading] challenged by a [party's] motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted." (Internal quotation marks omitted.) Gazo v. Stamford, 255 Conn. 245, 260, 765 A.2d 505 (2001). "A motion to strike . . . does not admit legal conclusions or the truth or accuracy of opinions stated in the pleadings." (Internal quotation marks omitted.) Faulkner v. United Technologies Corp., 240 Conn. 576, 588, 693 A.2d 293 (1997). The court "construe[s] the complaint in the manner most favorable to sustaining its legal sufficiency . . . [I]f facts provable in the complaint would support a cause of action, the motion to strike must be denied." (Internal quotation marks omitted.) Sullivan v. Lake Compounce Theme Park, Inc., 277 Conn. 113, 117-18, 889 A.2d 810 (2006). "A motion to strike is properly granted if the complaint alleges mere conclusions of law that are unsupported by the facts alleged." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, supra, 262 Conn. 498. Further, our Supreme Court "will not uphold the granting of [a] motion to strike on a ground not alleged in the motion." Blancato v. Feldspar Corp., 203 Conn. 34, 44, 522 A.2d 1235 (1987).
On a motion to strike, the court confines itself to the four corners of the complaint, and will not consider documents or countervailing proof that lies outside of the complaint. "In ruling on a motion to strike, the court is limited to the facts alleged in the complaint." (Internal quotation marks omitted.) Faulkner v. United Technologies Corp., supra, 240 Conn. 580. "A motion to strike challenges the legal sufficiency of a pleading . . . and, consequently, requires no factual findings by the trial court." (Internal quotation marks omitted.) Batte-Holmgren v. Commissioner of Public Health, 281 Conn. 277, 294, 914 A.2d 996 (2007). "Where the legal grounds for such a motion [to strike] are dependent upon underlying facts not alleged in the plaintiff's pleadings, the defendant must await the evidence which may be adduced at trial, and the motion should be denied." (Internal quotation marks omitted.) Commissioner of Labor v. C.J. M. Services, Inc., 268 Conn. 283, 293, 842 A.2d 1124 (2004).
This court takes "the facts to be those alleged in the complaint . . . and . . . construe[s] the complaint in the manner most favorable to sustaining its legal sufficiency . . . Thus [i]f facts provable in the complaint would support a cause of action, the motion to strike must be denied . . . Moreover, [the court notes] that [w]hat is necessarily implied [in an allegation] need not be expressly alleged . . . It is fundamental that in determining the sufficiency of a complaint challenged by a defendant's motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted . . . Indeed, pleadings must be construed broadly and realistically, rather than narrowly and technically." (Internal quotation marks omitted.) Connecticut Coalition for Justice in Education Funding, Inc. v. Rell, 295 Conn. 240, 252-53, 990 A.2d 206 (2010).
This case is only at the pleading stage. If this complaint adequately pleads a cause of action for corporate dissolution as a result of oppressive conduct, or that any corporate assets are being misapplied, the motion to strike must be denied. "It is of no moment that the defendants might prove facts which operate to bar the plaintiff's claim, the sole inquiry at this stage of the pleadings is whether the plaintiff's allegations, if proved, would state a basis for standing . . . [An] argument [that] would require the court to consider facts outside the face of the pleadings . . . would be improper on a motion to strike . . ." (Citations omitted.) Miller v. Insilco Corp., Superior Court, judicial district of New Haven, Docket No. 279267 (May 22, 1990, Schimelman, J.) ( 1 Conn. L. Rptr. 651); Edward J. Smith Co. v. Palmieri, Superior Court, judicial district of Ansonia-Milford, Docket No. CV 07 5003216 (March 14, 2008, Moran, J.) (denying motion to strike because contract was not attached as an exhibit to the original complaint, thereby making the grounds for the motion to strike dependent on facts not in the complaint); R.I. Pools, Inc. v. Lillien, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 04 4000871 (February 8, 2005, Wilson, J.) (concluding that the defendants' introduction of evidence that was not part of the complaint made the motion to strike a "speaking motion" and stated that the defendant was trying to accomplish through a motion to strike what is more appropriately accomplished through a motion for summary judgment).
As previously stated therefore, for purposes of a motion to strike, the court must restrict itself to the allegations contained in the complaint, and must accept those allegations as true.
Recognition of this principle of law in discussing a motion to strike avoids the repeated characterization of the allegations as allegations in this memorandum of decision.
Discussion
The Company is a closely held Connecticut corporation with a principal place of business in Southington, Connecticut. It was formed in 1956 as the result of a partnership primarily between two businessmen, Charles Gibbs and Robert Johnson, both of whom are now deceased. The Company has grown over the years into a worldwide leader in the metal working industry, specifically the supply and processing of wire and strip. The Company also maintains a network of metal service centers for its customers at locations throughout the United States and Canada. The Company's market share is such that it claims to be the primary source for wire and strip in North America. There is no public market for its stock, however, and this lawsuit would likely never have been filed if there was.
The Company's growth for many years was lead by its founding families, the Gibbs and the Johnsons. These are essentially the forces now arrayed on either side of this litigation. The Gibbs family and its allies are currently entrenched in the senior management of the defendant Company that bears its name, as well as being the majority shareholders. The plaintiff Johnson family is now reduced to the status of minority shareholders with no active role in running the business and without a seat on the Company's board. The Johnson family's primary contact with the Company these days (other than through their lawyers) is probably their periodic dividend checks.
When the Company was established in the 1950s, it was consistent with the founder's intent to structure the corporate ownership in a manner more akin to a closed partnership. The Company's original bylaws included a provision for share repurchases that required each shareholder who wanted to sell his shares to first offer the shares to the Company's other shareholders. If the fellow shareholders declined to buy the offered shares, the shareholder was then required to offer the shares to the Company. Only after those two conditions precedent were satisfied could a Company shareholder offer to sell its shares to a third party.
The defendants argue that the intent of the original incorporators is not relevant to the issues now before this court. However, this is simply a motion to strike, and that argument may be pursued at a later stage.
No doubt fearing that one of its competitors might acquire an equity stake in the Company by such a process, a corporate competitor whose interests would not be aligned with the best interests of the Company's other shareholders, the founders made a change in the corporate bylaws to enshrine the Company's right of first refusal. The bylaws were amended in 1960 to state that any shareholder wishing to sell his shares must first offer to sell them back to the Company. If the Company was not interested in buying the offered shares and declined purchase, the shareholder next had to offer their shares for sale to the other existing shareholders. It was only once these two offers to sell were declined that a shareholder could offer shares in the Company to a third party. This bylaw provision remains in effect today.
The Company is an example of what may happen when a generation of management by a pair of founding fathers passes from the scene, and a new generation takes its place in a prosperous but closely held corporation. The trusting and harmonious relationship that once existed between founding families in another era is not always as easily maintained or as easily inherited as the Company stock certificates passed down to the founders' heirs in subsequent generations. The Gibbs family owns and has always owned a majority of the Company's voting stock. As a result, the Gibbs family is in effective control of this private closely held corporation. C. Wayne Gibbs is the current Chairman of the Board of Directors, the former Chief Executive Officer and the Company's majority shareholder. The plaintiffs are the family heirs of founder Robert Johnson, and collectively own about 40% of the Company. The Johnson family has never owned a majority of the Company's voting stock, and other than its ownership of certain shares of non-voting stock, it currently has no control over the Company. The last family member to serve as an officer was the plaintiff Bob Johnson, the son of founder Robert Johnson. Bob Johnson retired in 1995 after a long career with the Company, and he was removed from the board of directors in 2005. No Johnson family members currently serve as corporate officers or hold any seats on the Company's board of directors.
The founder Robert Johnson, the plaintiff shareholders' predecessor in interest, made his original investment in the Company over 50 years ago, during the Eisenhower administration. Robert Johnson provided the majority of the initial funding for the Company. He also provided the know how and customer contacts to get the fledgling business off the ground, and recruited Charles Gibbs to join the new venture that now bears his name. Without Robert Johnson's substantial financial assistance and business acumen, the Company would never have been established. Robert Johnson died in 1970, and much of the Johnson family's collective wealth has not been diversified since then. It remains tied up in Company stock, for which there is no public market.
Although a majority of the plaintiffs' allegations of oppressive conduct by the Company focus on the events pertaining to the valuation and repurchase of the plaintiffs' shares, the complaint also alleges oppression in the form of slashed dividend payments to the plaintiffs. The issue of share repurchases will be discussed first.
Valuations Share Repurchases
The plaintiffs claim that, historically, the Company had regularly repurchased shares from its shareholders at book value, without applying discounts for marketability or minority interest. That situation changed following the death of founder Charles Gibbs in 2004. Charles Gibbs had previously served as both the Company's chief executive officer and chairman of the board of directors. However, after his death, the Company unfairly altered its method of repurchasing its shares to allow it to do so at a depressed price and to the detriment of the plaintiff shareholders. A valuation of the Company was performed for the estate of Charles Gibbs by a company called Empire Valuation. Empire applied multiple discounts, ultimately valuing the Company's stock far below book value at a per share price of $32.60.
The dissatisfied plaintiff shareholders questioned the accuracy and validity of the Empire valuation, and the Company suggested that the Johnsons undertake an independent valuation. In 2005, the plaintiffs hired a firm called Ireland Associates, LLC, to rebut the Empire valuation with another appraisal of the Company. The Ireland valuation on behalf of the dissident shareholders set a share price of $75.92. This was more than double the per share price proposed by Empire, working on behalf of the Company. The Company and its largest minority shareholder group were obviously far apart. But all valuations are based on opinions, and such opinions are only as good as the assumptions on which they are based, which may also involve a consideration of the reasons why the valuation was done in the first place. Perhaps the former is too low, calculated primarily with the single goal of lowering the bite of federal estate taxes for the Gibbs family. Perhaps the latter is too high, designed solely to favor a valuation the plaintiff Johnson family most desire, with only a single goal of share repurchase in mind, and not the operational needs of the Company itself. The ultimate determination will have to await the evidence, as this case is only at the pleading stage.
In December 2006, the Company announced a repurchase of a minimum number of shares on a pro rate basis in early 2007, at a price much closer to the Empire valuation rather than the Ireland valuation. This meant that the Company set the repurchase price significantly below its book value at the time, and marked the first implementation of the new method of share repurchasing. It replaced the Company's heretofore standard method of repurchasing shares at book value. The Company's explanation for the lower price was that it was attempting to be fair to all of its shareholders, both those who wanted to sell shares back to the Company and those who wanted to remain as shareholders. The Company further argues that no matter how badly a shareholder wants out, a closely held corporation has no obligation to use its resources to buy back shares.
As minority shareholders, the Johnson family could not challenge the Company's move away from repurchasing shares at book value to a much lower valuation price. This left the minority plaintiffs in the position of either selling their stock back to the Company at a deeply discounted price, or remaining shareholders in the face of steadily diminishing dividend payments. Because their valuation of the Company established a much higher value for their substantial holdings, the Johnson family elected not to participate in the share repurchase on the Company's terms. The plaintiffs shared the Ireland valuation report with Company management. Aware of the circulation of the Ireland valuation figures among other shareholders and interested parties, it seems reasonable to infer that the defendant felt compelled to respond, lest the value stated therein gain some currency. The Company sent a letter to all shareholders:
On January 18, 2007, an attorney representing members of a family with a large minority interest in the Company forwarded us a valuation they had done of the company. This valuation alleges a much higher enterprise value for the shares than what we have from Empire Valuation. We have reviewed this alternate valuation. We sent it to Empire for review. In our view and in the view of Empire, this alternative view, this alternative valuation is without merit. It does not value the proper time period. It includes faulty assumptions. It uses very questionable data. It was done without any input from the Company. For these reasons, we do not believe they have presented an accurate valuation of the Company for purposes of the current stock buybacks.
The plaintiffs contend that this letter misled shareholders, as the Company failed to disclose what specific data utilized was "questionable", and that the data in the valuation included five years of the Company's own financial statements.
Dividend Cuts
Claiming to be shut out of the corridors of Company power in the 21st century, the plaintiffs are in no position to influence management or its policies. However, the Johnsons do enjoy a cash dividend each year. This dividend is paid by the Company on the non-voting shares, generally amounting to several hundred thousand dollars annually to the Johnson family. But this is another corporate development that over the years has supposedly worked to the detriment of the plaintiffs. At the same time it was instituting a much lower share price for repurchases, the Company was also slashing its dividend. A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share).
In December 2003, the Company changed its long-term historical policy of paying a dividend of $2 per share annually. Effective January 1, 2004, the Company cut its dividend rate to $1.50 per share. The Company stated that this was expected to be a short-term management adjustment, and hoped that the dividend would return to its prior levels as the economy improved. Further, in a December 2003 letter to shareholders, the Company stated that the reason for the change was that it wanted dividends to stay in the range of fifty percent of earnings per share. However, this reasoning was not followed when the Company's earnings per share "exploded upward" from 2004 through 2007. In December 2008, the Company announced a further cut in the dividend rate to $1.25 per share.
The Company purportedly generated approximately $100 million in annual sales in 2007 and 2008, and gross profits in each of those two years in the neighborhood of $15 million.
As the Johnson family was shut out of the lucrative employment opportunities afforded to the Gibbs family, these dividend payments represented the only return on investment that the plaintiffs obtain from the Company. The plaintiffs contend that management lowered its dividend in an attempt to "squeeze" the minority plaintiff shareholders out of the Company altogether, by pressuring them to sell their non-voting shares back to the defendant Company at a price substantially below the true fair market value. In sum, the plaintiffs claim that the Company's unwillingness to repurchase shares in accordance with its prior practice, and its move to a much lower share price could only be justified if the Company was distributing financial benefits to its shareholders in other ways, such as through increased dividends. However, this was not so, and as a result of these changes, shareholders like the plaintiffs are faced with the "lose/lose" situation as described above. The Johnson family shareholders claim to be "at the mercy of Wayne Gibbs and the Company's management." The Company argues that the plaintiffs were treated like every other shareholder, and that the dividends paid to the Johnsons were no different than the dividends paid to every other shareholder, including Wayne Gibbs. However, Wayne Gibbs now controls approximately 93% of the Company's voting stock, and dividends are only a portion of the economic benefit he enjoys from the Company. The powers granted to a man in such a position of authority "are necessarily and at all times exercisable only for the ratable benefit of all the shareholders as their interest appears." (Emphasis added.) A. Berle, Jr., "Corporate Powers as Powers in Trust," 44 Harv. L. Rev. 1049, 1049 (1931).
The defendant argues that there is no allegation that a Johnson family member was refused employment, which may be a valid point to consider later on, but not on a motion to strike.
The bylaw provision which grants the Company the right of first refusal to repurchase its shares was also the subject of prior litigation between the Company and its dissident shareholder group. In 2007, the plaintiffs, with the exception of a trustee of a Johnson family trust, collectively offered the Company all of their voting and non-voting stock, as required by the bylaws. The Company accepted the plaintiffs' offer to sell their voting stock, but declined to purchase the non-voting stock. Litigation followed over the terms of the transaction. In Gibbs Wire Steel Co., Inc. v. Johnson, 255 F.R.D. 326 (D. Conn. 2009), the Company brought an action as a plaintiff in Superior Court against these same plaintiffs for breach of contract for failing to sell their stock to the Company pursuant to the bylaws. Citing diversity of citizenship, the defendants (the current plaintiffs in the instant case) removed the case to the United States District Court in Connecticut, and asserted a counterclaim that the bylaw provision mandating a right of first refusal constituted an unreasonable restraint on alienation. Judgment was entered in favor of the Company in federal court in 2009.
As a result of the federal lawsuit, the Company acquired title to the Johnson's voting shares through a purchase of all shares of the plaintiffs' voting stock. Left unpurchased by the Company and unsold by these plaintiffs were the remaining non-voting Company shares, hence this litigation. All other things being equal, voting shares have intrinsically greater value than non-voting stock, due to the voting rights attached to ownership of such shares and the corresponding opportunity to effect and/or direct changes in the Company. Now shorn of their voting stock as a result of the prior litigation between the parties, the reduced dividend payments represent the only economic benefit that nonvoting shareholders like the Johnsons realize from their investment. The plaintiffs contend that this created a "lose/lose" situation for non-voting shareholders, who are faced with one of two unpalatable choices. They could either sell their shares back to the Company at a discounted price substantially below book value, or remain on as shareholders in the face of steadily diminishing dividend payments and with no voice in the allocation of the Company's substantial profits.
In the aggregate, the plaintiffs own directly or beneficially over 250,000 shares of the Company's non-voting stock. This represents a sizable minority shareholder interest of approximately forty percent (40%) of the total issued and outstanding stock of this closely held corporation. It seems safe to say that the total value of all shares held by the Johnson family is in the millions of dollars, but not surprisingly, these two parties who disagree over so many other issues also disagree on the proper share valuation. The parties cannot agree on accounting principles that would employ valid criteria for making valuations on a per share basis. This case is not only a battle over the terms and conditions of any share repurchase plan. A set price per non-voting share and the declaration of dividends and how both are calculated are further disputed questions of fact. It is clear that if this dissolution proceeding is found to have merit when all the discovery has been completed, and if the plaintiff's case survives summary judgment, the balance sheets, if not the Company itself, could hang in the balance.
One valuation conducted in August 2008 pegged the Company shares held by the Johnson family at over $17 million, using a method purportedly based on net book value per share.
In its earlier motion to dismiss, the defendant argued that because the plaintiffs have not completed the process of offering their shares as prescribed by the bylaws, the plaintiffs have not exhausted the remedies available to them. The Company contended that this failure deprived this court of subject matter jurisdiction. The court was not persuaded, and as it stated in its earlier memorandum of decision denying the motion to dismiss, at its core the plaintiffs' complaint seeks relief from oppressive conduct by the Company's majority shareholders. That alone is enough to survive the motion to strike. The defendant argues that the complaint is devoid of any allegations that might support a finding of oppression by Company management. The court disagrees, finding that the facts as pleaded sufficiently set forth such a claim. It would indeed to be incongruous for this court to have previously denied the defendant's motion to dismiss on the basis that the complaint properly seeks relief from allegedly oppressive conduct, but to now grant the defendant's motion to strike for the opposite reason. While the defendant Company may raise valid arguments in its opposition to this motion, those arguments rely on facts, or the finding of facts, that lie outside of the complaint.
A fiduciary relationship is "characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other." Dunham v. Dunham, 204 Conn. 303, 322, 528 A.2d 1123 (1987), overruled on other grounds by Santopietro v. New Haven, 239 Conn. 207, 682 A.2d 106 (1996). Many relationships implicate fiduciary duties, including corporate directors. Konover Development Corp. v. Zeller, 228 Conn. 206, 222, 635 A.2d 798, 806 (1994). Because these associations are imbued with the utmost trust, the parties are bound to "act honestly, and with the finest and undivided loyalty . . . not merely with that standard of honor required of men dealing at arm's length and the workaday world, but with a punctilio of honor the most sensitive." (Internal quotation marks omitted.) Id., 220. Shareholders in a close corporation owe each other a fiduciary duty. Flight Services Group, Inc. v. Patten Corp., 963 F.Sup. 158, 160 (D.Conn. 1997).
It is clear that in enacting § 33-896, the legislature sought to protect shareholders of closely held corporations. "As the stock of closely held corporations generally is not readily salable, a minority shareholder at odds with management policies may be without either a voice in protecting his or her interests or any reasonable means of withdrawing his or her investment. This predicament may fairly be considered the legislative concern underlying the provision at issue in this case; inclusion of the criteria that the corporation's stock not be traded on securities markets and that the complaining shareholder be subject to oppressive actions supports this conclusion." Morrow v. Prestonwold, Inc., Superior Court, judicial district of New Haven, Docket No. CV 00 0445844 (March 22, 2002, Berdon, J.T.R.) ( 31 Conn. L. Rptr. 668, 670).
In analyzing whether dissolution is warranted, Connecticut courts examine whether the allegedly oppressive conduct of the majority shareholder has defeated the reasonable expectations of the minority shareholders. Id. Dissolution is an equitable remedy that is not to be ordered lightly. "Majority conduct should not be deemed oppressive simply because the petitioner's subjective hopes and desires in joining the venture are not fulfilled. Disappointment alone should not necessarily be equated with oppression. Rather, oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner's decision to join the venture." Id. The reasonable expectations test was employed in the case of Kanner v. Go Vertical, Inc., Superior Court, complex litigation docket at Stamford, Docket No. X05 CV 03 0196236 (September 15, 2005, Rogers, J.). The trial court found that a dissolution was not warranted, as the defendant corporate directors' actions did not violate the plaintiffs' rights as shareholders, and did not constitute illegal, oppressive or fraudulent conduct pursuant to § 33-896. This was because the plaintiff shareholders in that case did not have a reasonable expectation of continuing to manage the corporate facility, which was a profitable indoor climbing gym.
"Oppression in the context of a dissolution suit suggests a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members, or a visible departure from the standards of fair dealing and a violation of fair play as to which every shareholder who entrusts his money to a company is entitled to rely." Devivo v. Devivo, Superior Court, judicial district of Hartford, Docket No. CV 980581020 (May 8, 2001, Satter, J.T.R.) ( 30 Conn. L. Rptr. 52, 53-54). The concept of oppressive conduct in a closely held corporation is separate and distinct from illegal conduct by management. Oppressive conduct "is not synonymous with the statutory terms `illegal' or `fraudulent.' The term can contemplate a continuous course of conduct and includes a lack of probity in corporate affairs to the prejudice of some of its shareholders." Stone v. R.E.A.L. Health, P.C., Superior Court, judicial district of New Haven, Docket No. CV 98414972 (November 15, 2000, Munro, J.) ( 29 Conn. L. Rptr. 219, 225).
In an older case involving a predecessor statute granting the court the power to order a corporate dissolution, the Connecticut Supreme Court noted that the corporate form of organization was "enacted for the benefit of stockholders." Krall v. Krall, 141 Conn. 325, 334, 106 A.2d 165 (1954). The court in Krall found that the plaintiff minority shareholder had been deprived of any voice in the management of the business or any return from its profitable operation in the form of salary or regular dividends. Id. Granted, the allegations in this case do not approach the degree of corporate dysfunction in Krall, but in cases brought pursuant to § 33-896, the court must carefully analyze the actions taken by the controlling stockholders. In another dissolution case decided at the time of the Second World War, Olechny v. Thadeus Kosciuszko Society, 128 Conn. 534, 24 A.2d 249 (1942), the Supreme Court noted that such an order would depend on whether a corporation's business could continue to be carried on "with equal justice to all of its stockholders." (Internal quotation marks omitted.) Id., 540.
It is axiomatic that the Company shareholders owe each other a duty to deal fairly, honestly and openly. Therefore, the question of what is "oppressive" conduct is closely related to that duty. Perhaps the controlling group can demonstrate a legitimate business purpose for its actions. In making this inquiry, the court acknowledges the fact that the controlling group must have some room to maneuver in establishing the business policy of the Company. This includes discretion in valuing and repurchasing shares and declaring dividends, including the amount of any such dividend. However, when the majority advances an asserted business purpose for their actions, it is open to the plaintiffs to attempt to demonstrate that the same legitimate objectives could have been achieved through an alternative course of action less harmful to the minority shareholder's interest. Therefore, in a dissolution action, the court must weigh the legitimate business purposes, if any, and determine whether oppression is established such that dissolution is warranted.
Viewing the allegations in a light most favorable to the plaintiff, as the court must, as well as the reasonable inferences to be drawn therefrom, it may well be that the plaintiffs will be able to demonstrate that a design to pressure them to sell their shares at a price below their true value was at the heart of the Company's plan. It may also well be that the Company's board and management acted entirely properly and fully within their rights with respect to both share valuations, repurchases and the declaration of dividends. It seems plausible that if founders Robert Johnson and/or Edward Gibbs were alive today, this controversy would have never arisen in the first place. It seems equally plausible to note that if these two men could see what has happened since their passing, each would be vocal in their disapproval of some aspect of the conduct of both families. For purposes of this motion to strike, the court is satisfied that the complaint is sufficiently pleaded, and the motion to strike is without merit. Evidentiary determinations will have to await the evidence.
The object of the complaint is to furnish the defendant with such a description of the allegations against it that will enable it to make its defense, and to inform the court of the facts alleged, so that it may decide whether the particular cause of action is sufficiently pleaded. The defendant by way of this motion to strike asks for too much. Therefore, the merits of the plaintiffs' complaint and an assessment of the strength of their case must await the completion of discovery. It is premature to hold otherwise. To the concept of management oppression of this 40% owner of a closely held corporation, a 40% owner with no voice in management, the defendant Company interposes numerous objections. But having chosen a motion to strike as the vehicle with which to attack the validity of the allegations, the defendant must abide by the limited parameters of such a motion. It is elementary, but bears repeating, that the court's ability to decide the merits of this motion at the pleading stage is not the same as when the court rules on the pleadings on a later, more dispositive motion. That includes such matters as summary judgment, because the criteria for judging are different here. It has to do with certain presumptions the court must adhere to in favor of the non-moving party in its ruling. It is not that the allegations are necessarily true. It is first and foremost that all of the allegations that the plaintiffs are making must be taken as true for purposes of this — or any other — motion to strike.
It is apparent that this new round of litigation in Superior Court was invited — if not made downright inevitable — when the nonvoting shares held by the plaintiffs were left out of the resolution of the last legal battle between these two sides. That federal case did not settle all pending business disputes between the two parties. However, if a decree of dissolution is entered here pursuant to § 33-899, this state case most assuredly will do so. Perhaps this lawsuit is simply a cry for greater transparency and liquidity in a closed corporation, a squabble over an old and illiquid investment that is nonetheless substantial, but no longer meets the investment objectives of the current minority shareholders, the heirs of the original investor and Company founder. Clearly this alleged oppression case turns on a consideration of the business judgment rule, and the legitimacy of management's decisions surrounding such issues as the repurchase of non-voting shares, the declaration of dividends, and the application of forensically sound share valuation procedures. In the final analysis, it turns on whether the minority shareholders were in fact oppressed within the meaning of the statute.
General Statutes § 33-899(a) states: "If after a hearing the court determines that one or more grounds for judicial dissolution described in section 33-896 exist, it may enter a decree dissolving the corporation and specifying the effective date of the dissolution, and the clerk of the court shall deliver a certified copy of the decree to the Secretary of the State, who shall file it."
Based on the foregoing, the court concludes that the allegations plead a viable cause of action for dissolution pursuant to § 33-896. The defendant's motion to strike is therefore denied.
The parties once raised the prospect of settlement last year at an earlier oral argument. In its decision on the motion to dismiss, the court reminded the parties of the following cogent observation. It does so again, as it bears repeating. If the plaintiffs prevail, the court does not assume that a decree of dissolution pursuant to § 33-896 et seq. will necessarily result in the actual liquidation of the Company. For example, § 33-900(a) provides that in lieu of dissolution, the Company "may elect to purchase all shares owned by the petitioning shareholder at the fair value of the shares."
This is because "[t]he entry of a decree results in the termination of the business only if both the majority and the minority shareholders desire that result. Each faction has the ability at any stage of the proceedings to ensure the continued existence of the firm by buying out, or selling out to, the other faction. The business will cease only if continuing it is not in the interest of any of its shareholders.
The point becomes clearer if one focuses on the motives for bringing a dissolution proceeding. Except for the rare case where the petition is prompted by pique, a shareholder suing for dissolution is trying to accomplish one of three things: (1) to withdraw his investment from the firm; (2) to induce the other shareholders to sell out to him; or (3) to use the threat of dissolution to induce the other shareholders to agree to a change in the balance of power or in the policies of the firm. All of these objectives can be accomplished without dissolution. If the petitioner wants to sell out, he is interested in receiving the highest possible price and is indifferent whether the purchase funds are raised by the other shareholders individually or by a sale of the firm's assets. If the second or third objectives motivate the suit, it is plain that the petitioner does not want dissolution at all. In all three situations, a dissolution petition is a means to another end.
Since the petitioner can always achieve his purposes without dissolution, and since the defendant will always oppose it, the dispute is very likely to be settled without liquidating the firm's assets and terminating its business. The court's decision to grant or deny dissolution is significant only as it affects the relative bargaining strength of the parties; negotiations will go forward in any event. J.A.C. Hetherington M. Dooley, "Illiquidity and Exploitation: A Proposed Statutory Solution to the Remaining Close Corporation Problem," 63 VA. L. REV. 1, 27 (1977).
IT IS SO ORDERED,