by Mark Sophir1

John O'Brien2

I. Introduction

Two siblings or friends start a business, which they incorporate as equal owners. They work hard, grow the business successfully and later bring in their children as shareholders while continuing to maintain the 50/50 ownership arrangement by family. Conflicts arise as the original owners age or die, and later generations of family members jockey for position, compensation and control. Ultimately, disagreements concerning the company's direction and the relative contribution and worth of other shareholders produce management deadlock. Indeed, relationships become so strained that continuing to operate the business with some of the shareholders becomes unproductive and often unbearable, especially to the family that no longer effectively controls the office of president and does not have practical control of day-to-day operations.

This hypothetical scenario is typical of many ownership disputes that arise in a family-run or closely-held business. Before enactment of § 351.467, a disgruntled 50% shareholder or group of family shareholders who wished to divide, sell, liquidate or otherwise separate from the company on fair terms (without a shareholder agreement addressing this situation) was essentially left with the prospect of a lengthy and costly lawsuit and attempting to satisfy the substantial burden necessary for dissolution under § 351.494. By contrast, § 351.467 attempts to afford a relatively expeditious, considerably less expensive and virtually automatic means for two 50% shareholders or qualifying family groups to accomplish an equitable discontinuance of the business in its present form, whether by dissolution, sale, or negotiation.

II. The No-Fault Dissolution Statute, Its Purpose And Construction

Section 351.467 enables a qualifying shareholder (or shareholder group) to dissolve the business within 180 days merely by filing a simple petition containing a couple of basic assertions.³ The trigger points for application of the statute are essentially only two-fold:

1. The existence of two 50% shareholders or shareholder groups (incorporating the attribution rules of §267 of the Internal Revenue Code); and

2. The filing of a petition by one of the 50% shareholders or shareholder groups alleging a desire to discontinue the business of the corporation, and an intention to dissolve the corporation in the absence of an agreed plan of disposition. (The plaintiff must also attach a proposed plan of discontinuance and distribution to the petition.)

Assuming these criteria are met, and the parties have not reached an agreement on a plan to discontinue the business within 90 days, and have not completed the implementation of that plan within 180 days (or otherwise have not agreed to extend one or both of these periods), the court must dissolve the corporation and appoint one or more trustees to wind-up the affairs of the corporation. In other words, the statute is essentially self-executing and completely removes discretion from the court. The statute does not provide much guidance to the court or the trustee(s) concerning how the dissolution and distribution of assets should be accomplished, except that it should be performed in a manner designed to maximize shareholder value, which may include the sale of the corporation as an option.

A. The History and Purpose of the Statute

The timing and circumstances surrounding the adoption of this statute have been called into question,⁴ but it was passed unanimously by both the Missouri House and Senate and signed into law by Governor Carnahan on August 28, 1999.⁵ Some commentators have criticized the merits of the statute because (i) dissolving a corporation has traditionally been regarded as a drastic remedy, (ii) Missouri law has other means to procure dissolution, and (iii) shareholders themselves arguably could have provided for dissolution by contract or through a voting trust.⁶ A countervailing argument is that the statute effectively forces a recalcitrant 50% shareholder who holds practical control of a qualifying company,⁷ and remains unwilling to change the status quo (or to purchase the other shareholder's interest or sell his/her interest at a fair value), to come to the bargaining table or otherwise be subject to a forced statutory dissolution.

While general dissolution law provides a remedy to a dissatisfied 50% shareholder, i.e., §351.494(2), the standard to procure that remedy is high (essentially requiring proof of fraud, waste of corporate assets, or deadlock for an extensive period or with irreparable injury). In addition, the cost and time to pursue this relief is generally considerable. The owners conceivably could have agreed to this type of relief at the time of incorporation, but the practical reality is that shareholders forming a company are usually on good terms. They generally do not anticipate the substantial disagreements and impasses that often arise in these types of businesses.

Practitioners can naturally debate the merits of the statute, but the fact remains that § 351.467 is currently valid law. No reported appellate decisions have interpreted this statute in the more than three years since its adoption, but the statute has been upheld by at least one recent circuit court.⁸ The absence of reported cases likely reflects the fact that the mere filing (or threatened filing) of a claim under the statute is apt to lead to negotiated resolution of the dispute without need for judicial dissolution and court-appointed trustee. Indeed, the authors (and, undoubtedly, other practitioners) have filed or prepared for filing several claims pursuant to the statute that have resolved impasses between two 50% shareholders or qualifying shareholder groups.

B. Potential Challenges to the Meaning and Application of the Statute

The statute's relatively simple and mandatory provisions leave little opportunity for judicial discretion or challenge. Nevertheless, because the statute is not a model of clarity, counsel may attempt to fashion arguments to prevent or limit its application. For example, issues have been raised concerning: (1) what constitutes two 50% shareholders where related family members are on opposite sides of the dispute; and (2) whether the party invoking the dissolution statute can purchase the company from the court-appointed trustee(s). However, a recent decision from the circuit court of the City of St. Louis suggests that these arguments will likely prove unsuccessful.

1. What Constitutes Two 50% Shareholders Where There Are Related Family Members on Opposite Sides of the Dispute?

Perhaps the statute's most interesting and biggest potential ambiguity concerns the meaning of two 50% shareholders where related shareholders are on opposite sides of the dispute. The statute incorporates the attribution rules contained in § 267 of the Internal Revenue Code, which considers "related taxpayers" to include, among others, "brothers and sisters (whether by whole or half blood), spouses, ancestors, and lineal descendants."⁹ Adoption of § 267 was undoubtedly intended to expand the application of the statute to closely-held family businesses with two de facto 50% shareholders, but a literal reading of the statute and I.R.C. § 267 has caused some commentators to postulate that it actually restricts the situations where § 351.467 applies.

Specifically, it has been argued that the no-fault judicial dissolution statute does not apply where two 50/50 shareholders are closely related (i.e., siblings, parents, children, etc.) or where an otherwise qualifying 50% shareholder group includes one or more shareholders closely related to a shareholder of the opposing 50% shareholder group.¹⁰ However, this precise argument was recently made in Larson v. Bradburn Sch. Supply, Inc. and rejected by the equity division of the circuit court of the City of St.Louis.¹¹

In Bradburn, a mother and her two sons, collectively owning 50% of the shares of the company, sought to apply § 351.467 against a mother and her son collectively owning the remaining 50% of the shares. Like many closely-held, family-run businesses, the mother of the plaintiff family and the mother of the defendant family were siblings, and thus "related taxpayers." There was no question in Bradburn that the desire to invoke § 351.467 (and other corporate impasse issues) broke down strictly along family lines and that each family represented collectively a 50% shareholder group consisting only of "related taxpayers." The defendant group conceded that the plaintiff group's interest constituted one 50% shareholder group and that the defendant group's interest constituted a second 50% shareholder. However, defendants argued that I.R.C. § 267 created a third shareholder consisting of the combined interests of the mothers of both families because they are sisters. Defendants said, therefore, that there were three rather than two shareholders, as required by statute. An alternative variation of the same theme is that the shares of the plaintiff family's mother should be attributed to the defendant family (and the shares of the defendant family's mother should similarly be attributed to the plaintiff's family), thereby causing each of the families to have shareholder interests which exceed (rather than equal) 50%, as provided by the statute.

If the statute were to credit these arguments, its use would effectively be precluded in cases the legislature was undoubtedly most interested in addressing: shareholder disputes among closely-related family members, including situations with two closely-related equal shareholders. Such a construction would also result in combined shareholder interests that collectively exceed 100%.

Bradburn employed generally-accepted principles of statutory construction and held that the statute did apply to the shareholder configuration at hand. The court noted that "[t]he issue is whether, as between plaintiffs and defendants, there are two 50% ownership stakes subject to attribution."¹² Given the statute's intention to afford a remedy under § 351.467 in the case of family-run closely-held corporations, the court, in effect, used a two-step process: the shareholders were first aligned according to their position with respect to dissolution under the statute, and then the court applied the I.R.C. § 267 attribution rules with respect to the groups separately to determine whether each group constituted a 50% shareholder.

2. Can the Party Invoking the Dissolution Statute be the Purchaser of the Company?

Section 351.467(3) expressly envisions that the court-appointed trustee(s) may sell the company to achieve the assigned objective of maximizing shareholder value. Naturally, the sale of a company as a going concern will often produce a greater value than merely liquidating its assets. Further, the current shareholders, especially in a family-run or closely-held company, are among the parties most likely to have an interest in purchasing the business.

At the same time, § 351.467(1) requires that the petition for dissolution allege that plaintiff "desires to discontinue the business of such corporation and to dispose of the assets used in such business in accordance with a plan to be agreed upon by both stockholders." Seizing upon this language, Bradburn's defendant group effectively took the position that the plaintiff group should not be permitted to submit a bid to purchase the company from the court-appointed trustee because a party cannot simultaneously wish to "discontinue the business" and at the same time seek to acquire the business, an act of continuation. Anticipating such an argument, and reconciling its desire to discontinue the business with the defendant family against its desire to participate in a possible bid or purchase of the company, Bradburn's plaintiff group pleaded that it wished to discontinue the business "in its present form" (i.e., as presently constituted) with the other 50% shareholder group.

Bradburn rejected the argument that plaintiffs did not really seek to discontinue the business, and held that a petitioning shareholder's motives or strategy to gain control of the business is irrelevant: "[O]nce the statute is properly invoked, it is the court's trustees who will decide how to dispose of the business, unless the shareholders can agree."¹² Thus, a plaintiff invoking § 351.467 is not precluded from bidding on or purchasing the company.¹³ Indeed, in the absence of permitting a plaintiff to participate in the bidding process, there may be no viable competition to ensure that true market value is achieved.

C. Appeal of Order and/or Trustee Action

An order of dissolution and appointment of trustees is likely an appealable order,¹⁴ but it is not clear whether a party dissatisfied with a court-appointed trustee's conclusions has any recourse with the circuit court. Bradburn was not appealed and, as noted, there have been no reported decisions involving either a judicial order or the actions of an appointed trustee pursuant to § 351.467. The statute itself is silent about the circuit court's role once a trustee has been appointed. Bradburn noted that "[t]he actions of the trustees are in the nature of enforcement of the Court's judgement and are ancillary to that judgment."¹⁵ Perhaps this statement suggests that the circuit court retains jurisdiction of any challenge to the trustee's action. Nevertheless, this remains an open question.

III. Practical Applications For Resolution Of Impasse

Provided there are, in fact, two qualifying 50% shareholder groups and the statute's procedural requirements have been met, the mere filing of a petition under § 351.467 should generally lead to non-judicial resolution of the dispute. These types of cases often involve shareholders who feel very passionately about their positions and who may be prepared to "spend whatever it takes." Nevertheless, the statute's self-executing and mandatory provisions leave little reason to proceed with a judicial dissolution and the court's appointment of a trustee, other than to foster delay and increase costs. Accordingly, once a valid petition has been filed, counsel should generally encourage their clients to settle the impasse, agree upon a dissolution or sale, or at least consent to an approved procedure for sale or disposition of the company.

A. Advantages of Resolution by Parties

There are several reasons why it is generally more advantageous for the parties to resolve their differences (or at least agree to a procedure for resolution) rather than proceed with the court's appointment of a trustee to wind up the business' affairs under the statute.

1. Greater Control over the Disposition Process – Once a proper petition pursuant to § 351.467 has been filed, dissolution will occur after 180 days unless the parties collectively agree to halt or delay the process. Resolution by the parties may better enable them to achieve a disposition on terms they can control and accept, and at a time which is most advantageous to maximize the value of the company. The statutory alternative creates more uncertainty and places important decisions with a court-appointed trustee, who may choose a course of disposition and timing that leaves neither party content.

2. Less Cost – The court-appointed trustee(s) will undoubtedly feel compelled to review financial statements, meet with the shareholders, and investigate alternatives for dissolution, including sales to third parties, and may decide to advertise the company for sale and entertain offers with respect to same, and/or consult with accountants or other experts. These activities naturally cost money, expenses that the company will bear. Indeed, the statute has no limit on what a trustee may decide is appropriate to discharge his/her duties. If the parties can agree concerning disposition of the company, or at least on a proper procedure to resolve the issue of disposition, both sides will benefit by this cost savings.

3. Less Delay – The court-appointed trustee may have to spend a substantial amount of time learning the company's business, as well as the industry as a whole, and may have other matters to handle that take precedence. In short, the parties can expect that a trustee will take greater time arriving at a decision concerning disposition than the parties themselves would take. Unlike the strict time frames set forth for dissolution and the appointment of the trustee(s), the statute has no designated time limit for the trustee(s) to wind up the company's affairs. Delay could also reduce the company's value in the interim.

4. Keeping the Business in the Family – While the price existing shareholders are willing to pay for the company often will exceed the market value or liquidation value (especially in a closely-held, family-run business), sometimes a third party – especially a larger competitor in the field – may be willing and able to pay more for the business than either shareholder group. The parties may have a mutual non-economic interest in keeping the business in the family for a variety of reasons, such as protecting long-term employees, maintaining a company family name, and/or simply preventing an unfriendly competitor from running the business. Since the arguable sole objective under the statute is to maximize shareholder value, the court-appointed trustee may feel compelled to ignore family wishes or non-economic considerations in the face of a larger offer from a third party.

5. Potentially Greater Value for the Shares – A significant component of the value of a closely-held company is often an agreement that the company's principals will not open a competitive business, call upon company customers, and/or solicit key employees after the sale for a reasonable period of time. A court-appointed trustee could not likely compel any shareholders to sign a non-compete or non-solicitation agreement. Thus, the value of the business in the open market (or, for that matter, to either shareholder group) may, in many cases, be significantly impaired in the absence of a negotiated resolution that includes a non-compete and/or non-solicitation agreement as part of any sale.

B. Mechanisms for Resolution

One means to achieve resolution of a petition brought under § 351.467 is, obviously, for the parties to negotiate and agree upon a sale of one shareholder group's interest to the other. However, it is not uncommon that each group will want to buy out the other group's interest. Alternatively, one shareholder group may be willing to sell its interests, but may be concerned that disclosing its willingness to sell to the other side could undermine any effort to achieve a fair price. One approach that has been successfully used to overcome these obstacles is to agree to an auction. The parties enter into an agreement stipulating to the auction process, deciding upon the auctioneer or arbitrator (such as a retired judge, mediator or respected member of the bar), and establishing the ground rules for bidding (including such issues as who makes the first bid, the bidding increments, the time to bid, the payment terms, etc.). To prevent a family solely interested in selling its interest from driving up the price with false bids, it may also be advisable to incorporate a requirement that each side deposit a reasonable amount in escrow as a pre-condition to making a bid (which will be forfeited in the event the party makes a bid and does not close on the transaction).

Ultimately, the determination of which shareholder group will wind up with the company (in cases where both sides wish to be the buyer) will likely turn on which side is willing and able to pay more for the company. This may provide an inherent advantage to the party with greater financial means and/or with greater access to financing, and may therefore produce inequitable consequences in some instances. However, this advantage is likely no different than the outcome that would occur if the parties proceed under § 351.467, since the court-appointed trustee is authorized by statute to maximize shareholder value and will, presumably, accept the highest offer.

Aside from agreeing upon the procedural mechanism for achieving a resolution, the parties need to make clear exactly what is being auctioned. It is highly recommended that the parties execute a detailed written agreement that attempts to anticipate as many of the potential issues that may arise as possible to limit the risk of future litigation and to make sure that the parties are bidding on the same thing. The auction or arbitration agreement should essentially address all of the specifics of the proposed sale, attempting to leave the price to be paid as the only remaining issue to be determined by the auction. Negotiation over the terms of such auction or arbitration agreement should, in theory, be relatively non-acrimonious in this auction process, since the parties do not know in advance whether they will be the buyer or seller, and, therefore, are less inclined to be advocates for unreasonable terms that favor one side or the other.

C. Recommended Components of an Agreement

Some critical issues to be considered in any auction or arbitration agreement include the following:

1. Determining whether the sale will be for the company's assets or stock. In a very strict sense, one would expect the auction process to result in the sale of one party's 50% stock position to the other party, but the agreement could provide the winning bidder the opportunity to convert the transaction to an asset sale. That is, both shareholders would agree in advance to sell the corporation's assets to another entity, which, in most cases, is likely to be a new entity established by the winning bidder. The tax implications to each party associated with each type of sale can be very different and may materially affect the purchase price a potential purchaser would be willing to pay. In general, an asset sale favors the buyer and a stock sale favors the seller, but this will depend on the nature of the business, the book value of assets and other factors. Consulting with a tax expert concerning the implications of each is essential. The crucial point here is that if this transaction structure element is an issue, the shareholders in the agreement should address it.

2. Compiling and agreeing upon a list and description of all assets and liabilities. Ideally this list would be formulated from financial statements that have been certified or at least prepared by an independent accounting firm. Particular attention will need to be paid to accounts receivable and accounts payable, as well as to other unknown significant potential liabilities (such as tax liabilities and actual, threatened or potential litigation). The parties may want to address what happens if actual accounts receivable collected fall short of (or significantly exceed) anticipated receipts or, conversely, if actual liabilities exceed anticipated amounts. This component of the agreement is especially important where one party may not have equal access to financial and other information. Naturally, adequate access to all relevant financial information (generally allowed a shareholder by § 351.215 anyway) should be a prerequisite to a shareholder group's entering into any such agreement.

3. Incorporating a non-compete and/or non-solicitation provision (where one does not already exist). Both non-compete and non-solicitation agreements are generally enforceable in Missouri if the principal has significant customer contacts and/or access to confidential information and the company has a legitimate protectable interest in such information.¹⁶ The absence of an agreement by the company's selling principals to refrain from opening a competitive business for a reasonable period of time following the sale will, in many cases, substantially reduce the company's value. Accordingly, incorporating a reasonable non-compete/non-solicitation agreement is ordinarily a good idea if the objective is to increase the company's value. However, if either shareholder group opposes execution of such an agreement, and cannot be persuaded of the merits of doing so, this should not be a deal breaker since, as noted, a trustee could not ordinarily compel the parties to enter into such an agreement.

4. Developing a process for handling future disputes that may arise. Disputes can easily arise in connection with the interpretation and enforcement of the agreement. A prime area of potential dispute is the value and timing of accounts receivable and accounts payables. Accordingly, it may be helpful to establish a range of acceptable collections and payments in the agreement, such that a party cannot initiate further proceedings unless specified thresholds are exceeded, and to keep certain sums to be paid held in escrow. This may go a long way to limiting the nature, costs and collectability of further disputes down the road. The parties may also want to incorporate an arbitration provision to resolve issues under the agreement or, alternatively, agree upon an appropriate forum for any litigation.

There are undoubtedly other important issues to address in the agreement that may be unique to a particular business or situation. As is often the case, time spent on the front end attempting to identify and resolve potential areas of dispute and drafting a clear and unambiguous agreement may save considerable time and cost in litigation down the road.

IV. Conclusion

Section 351.467 serves as significant leverage for a qualifying disgruntled 50% shareholder or shareholder group to achieve a separation from the other 50% shareholder group by dissolution, sale, or purchase of the company. The filing of a petition pursuant to the statute (or the mere threat of such a filing) should in most instances lead to a negotiated resolution of the shareholder impasse without requiring the court to actually dissolve the company and appoint a trustee. Careful planning in the negotiation and preparation of a resolution agreement is strongly advised. Naturally, counsel should also advise clients who wish to form corporations with two 50% shareholders or related shareholder groups of the existence of this no-fault judicial dissolution statute, and its potential ramifications for the future existence of the enterprise.

Footnotes

¹ Mr. Sophir is a partner in the law firm of Armstrong Teasdale, LLP, where he practices in the firm's litigation department. Mr. Sophir received his J.D., cum laude, in 1985 from the University of Texas School of Law.

² Mr. O'Brien is a partner in the law firm of Armstrong Teasdale LLP, where he practices in the firm's corporate department. Mr. O'Brien received his J.D., cum laude, in 1993 from Saint Louis University School of Law.

³ 351.467. Filing for discontinuation of certain corporations – procedure.

1. If the stockholders of a corporation of this state, having only two shareholders each of which own fifty percent of the stock therein, shall be unable to agree upon the desirability of continuing the business of such corporation, either stockholder may file with the circuit court in which the principal place of business of such corporation is located a petition stating that it desires to discontinue the business of such corporation and to dispose of the assets used in such business in accordance with a plan to be agreed upon by both stockholders or that, if no such plan shall be agreed upon by both stockholders, the corporation be dissolved. Such petition shall have attached thereto a copy of the proposed plan of discontinuance and distribution and a certificate stating that copies of such petition and plan have been transmitted in writing to the other stockholder and to the directors and officers of such corporation.

2. Unless both stockholders file with the court: (1) within ninety days of the date of the filing of such petition, a certificate similarly executed and acknowledged stating that they have agreed on such plan, or a modification thereof, and (2) within one hundred eighty days from the date of filing of such petition, a certificate similarly executed and acknowledged stating that the distribution provided by such plan had been completed, the court shall dissolve such corporation and shall by appointment of one or more trustees or receivers, administer and wind up its affairs in a method intended to realize the maximum value for the stockholders, including the sale of the company as a going concern, if appropriate. Either or both of the above periods may be extended by agreement of the stockholder, evidenced by a certificate similarly executed, acknowledged and filed with the court prior to the expiration of such period.

⁴ William C. Lhotka, Family Accuses Sen. Klarich of Conflict of Interest, St. Louis Post-Dispatch, December 19, 1999 at A1.

⁵ Section 351.467, RSMo 2000, was derived from House Committee Substitute Senate Bill 278 and was passed by a vote of 31-0 in the Senate and 155-0 in the House. H.C.S. S.B. 278, 90th Gen. Assem., 1st Reg. Sess. (Mo. 1999); Journal of the Senate, 90th Gen. Assem., 1st Reg. Sess. (February 9, 1999); Journal of the House of Representatives, 90th Gen. Assem., 1st Reg. Sess. (April 21, 1999).

⁶ See, e.g., Mark A. McColl, Paul G. Klug & Jay Nathanson, New Missouri Law Allows No-Fault Dissolution, 56 J. Mo. Bar 251 (2000).

⁷ For example, an individual holding the office of president who also maintains 50% control of the board of directors (by virtue of holding 50% of the company's voting shares) cannot, in most instances, be removed from office, and can essentially remain in charge of the company until judicially forced out.

⁸ Larson v. Bradburn Sch. Supply, Inc., Cause No. 014-01643, Circuit Court of the City of St. Louis, Division 3, 22nd Circuit, Hon. Robert H. Dierker (December 18, 2001) (unpublished opinion).

⁹ I.R.C. §267(c)(4) (1999).

¹⁰ McColl, at 256; 1 F. Hodge O'Neal & Robert B. Thompson, O'Neal's Close Corporations: Law and Practice, §9.26, n. 14, pp. 9-152-9 – 153 (2000).

¹¹ See note 7.

¹² Larson at 4-5.

¹³ See Reeves v. McReynolds, 1996 W.L. 342100, at 2 C.A. No. 8922 (Del.Ch., June 12, 1996) (noting that under comparable Delaware Section 273, remedies included either one shareholder buying out the other or liquidation of the corporation).

¹⁴ Larson at 5.

¹⁵ Id.

¹⁶ See e.g., William M. Corrigan, Jr., Non-Compete Agreements – An Overview, 54 J. Mo. Bar 140 (1998).