Franks v. Franks - 330 Mich. App. 69, 944 N.W.2d 388 (2019)

Rule:

Because the Legislature grouped willfully unfair and oppressive with illegal and fraudulent in MCL 450.1489(1), a court cannot lightly adopt a construction that transforms the last category into a form of strict liability. Therefore, with regard to acts that are willfully unfair and oppressive, the complaining shareholder must prove that the directors or persons in control of the corporation engaged in a continuing course of conduct or took a significant action or series of actions that substantially interfered with the interests of the shareholder as a shareholder, and that they did so with the intent to substantially interfere with the interests of the shareholder as a shareholder. MCL 450.1489(1), (3). Thus, a defendant can avoid liability by showing that he or she did not have the requisite intent when he or she took the acts that interfered with the shareholder's interests. Consequently, defendants can establish a question of fact on this element by proffering evidence from which a finder of fact could conclude that the defendants' actions, though the actions may have substantially interfered with the shareholder's interests as a shareholder, were nevertheless done for a legitimate business reason and otherwise not done with the intent to harm the shareholder's interests as a shareholder.

Facts:

The late Newell A. Franks founded Burr Oak in 1944. Burr Oak manufactures and sells machine tools in the heat-transfer industry. The parties to this case are all related to Newell A. Franks in some way. Newell A. Franks was the father of defendant Lawrence Franks, former plaintiff Richard Franks, and Tom Franks, who was deceased by the time of this litigation. Lawrence Franks is the father of defendant Newell A. Franks II, defendant David Franks, and defendant LeeAnn McConnell. LeeAnn McConnell is married to defendant, Brian McConnell. Tom Franks was the father of plaintiffs Jeffrey Franks and Willis Franks. Each individual defendant owns voting shares—Class A shares—of Burr Oak or has an active role in the management of the corporation, as noted by Burr Oak's then accountant, Bruce Gosling. Newell A. Franks II is the corporation's chief executive officer and the chair of the board of directors. Plaintiffs each own Class B or Class C shares in the corporation, which are nonvoting shares. Class B shares do not get dividends, but Class B shares can be converted into Class C shares, which do get dividends. Plaintiffs have no role in the management of the corporation. In September 2013, Jeffrey Franks, Richard Franks, and Willis Franks sued defendants. They alleged that Lawrence Franks, David Franks, Newell A. Franks II, Brian McConnell, and LeeAnn McConnell used their control of Burr Oak to benefit themselves and their families at the expense of the minority shareholders. They asserted that the identified conduct amounted to "illegal, fraudulent, or willfully unfair and oppressive conduct" in violation of MCL 450.1489. They asked the trial court to remedy the oppression by, among other possible remedies, ordering defendants to purchase plaintiffs' shares at fair value. On July 25, 2017, the trial court held a hearing to state its ruling. The trial court adopted plaintiffs' proposed findings of fact and found that plaintiffs' shares were worth $712 per share. The trial court specifically held that it could not apply a discount to lower the fair value of the shares. The trial court subsequently signed an order requiring Burr Oak to purchase plaintiffs' shares within two years at a price of $712 per share. The trial court's order provided that Burr Oak would pay equitable interest and plaintiffs' attorney fees as well. On December 28, 2017, the trial court entered a stipulated order dismissing plaintiffs' remaining claims without prejudice. It further provided that its order requiring redemption would be stayed pending defendants' appeal. The trial court later entered an order dismissing plaintiffs' remaining claims with prejudice. Defendants now appeal as of right.

Issue:

Did a credibility question or the equitable nature of a shareholder-oppression claim under MCL 450.1489(1) necessarily bar summary disposition?

Answer:

No

Conclusion:

The court held that neither a credibility question nor the equitable nature of a shareholder-oppression claim under MCL 450.1489(1) necessarily barred summary disposition because the case law did not make summary disposition inappropriate whenever motive or intent was an essential element or in equitable actions. The claim required proof of intent to act in an unfair and oppressive manner that substantially interfered with shareholder interests because the word "willfully" in the statute so indicated, as did the grouping of willfully unfair and oppressive acts with illegal and fraudulent acts. Because the business judgment rule applied only in the absence of wrongful conduct, examining dividend policy was permissible. Factual issues precluded summary disposition because some evidence indicated that nonpayment of dividends might have been the result of a legitimate need for cash.