Denis HICKEY, on behalf of himself and all other shareholders of Hickey Ranches, Inc., an Oregon corporation, Plaintiff-Respondent Cross-Appellant,
Andrew J. HICKEY; and H & H Cattle Feeders, Inc., an Oregon corporation, Defendants-Appellants Cross-Respondents, and HICKEY RANCHES, INC., an Oregon corporation, Defendant-Respondent, and John DOES 1-10, Defendants
Argued and Submitted September 6, 2013.
Klamath County Circuit Court 0704386CV. Lane W. Simpson, Judge.
Bruce C. Moore argued the cause and filed the briefs for appellants-cross-respondents.
Eric B. Mitton argued the cause for respondent-cross-appellant Denis Hickey. With him on the briefs was Hornecker, Cowling, Hassen & Heysell, L.L.P.
No appearance for respondent Hickey Ranches, Inc.
Before Ortega, Presiding Judge, and Sercombe, Judge, and Hadlock, Judge.
[269 Or.App. 260] ORTEGA, P. J.
Andrew Hickey (Andy) and H & H Cattle Feeders, Inc. (H & H) appeal a general judgment, challenging two remedies ordered by the trial court under ORS 60.952 upon its finding that Andy had engaged in self-dealing between Hickey Ranches, Inc. (HRI), a closely held family corporation, and H & H, a company that Andy wholly owned. Denis Hickey (Denis), Andy's brother and a minority shareholder of HRI, filed this action against Andy, alleging that Andy, in his roles as a director, officer, and controlling shareholder of HRI, had engaged in self-dealing and other misconduct over several years. Andy challenges remedies ordered by the trial court (1) amending HRI's articles of incorporation and bylaws to eliminate voting rights from the preferred shares--which, before the court's decision, had provided Andy with voting control of HRI--and (2) awarding $195,092.51 to HRI, which the court based upon its finding that Andy owed HRI for an " untrustworthy" payment made from HRI to H & H. Andy does not challenge the court's finding of his wrongful conduct.
We summarize the assignments of error and our conclusions as follows. Andy's first three assignments of error challenge the trial court's order that amended the articles of incorporation and bylaws of HRI as a means to eliminate voting rights from the preferred shares, which had the effect of replacing Andy with Denis as the controlling shareholder. We reject without published discussion Andy's second and third assignments and address Andy's first assignment, which contends that removal of voting rights from the preferred shares was not permitted under ORS 60.952 (allowing for remedies for shareholders of closely held corporations); we conclude that the trial court's remedy was legally impermissible. Andy's fourth assignment of error challenges the court's award of damages of $195,092.51 to HRI for loan repayments from HRI to H & H that were not supported by documentary evidence. Andy contends that Denis did not meet his burden of proving actual damages. We conclude that, in awarding damages, the trial court did not consider whether an offset [269 Or.App. 261] should be applied to the remedy for the self-dealing transaction between HRI and H & H to compensate for benefits that H & H had provided to HRI, and remand for the trial court to consider that issue. Finally, Denis cross-appeals, raising two assignments of error;
we reject the first without published discussion, and address the second, which contends that the trial court made a calculation error in its award of damages regarding excess salary taken by Andy. The trial court's two letter opinions explaining the award are inconsistent, and we remand to the trial court to consider whether the evidence supports its second letter opinion, in which it stated that there was no excess salary in the amount of $12,000 for one of the years in question. Accordingly, we reverse and remand the general judgment.
The father of Andy and Denis, Denis Hickey Sr. (" Denis Sr." ), incorporated HRI, a ranching business, in 1972. Denis Sr. had six children, and the shares of voting common stock were divided equally among them. Each sibling also owned about 303 shares of voting preferred stock. Denis Sr. owned 3,849 shares of preferred stock, and in 1990, decided that Andy would be allowed to control HRI. He transferred his interest in HRI to a trust, and the trust entered into an agreement with Andy in which Andy would have the option to purchase a controlling interest in HRI for $266,600. Andy exercised his option to purchase the preferred shares in 1995, and the trust allowed him to purchase the stock in 10 yearly installments of $37,646.13, which would be paid from his salary as an officer of HRI. In 2006, Andy finally acquired all 3,199 of the shares covered by the stock purchase agreement and, at the time of trial, he owned a total of 3,602 shares (the purchased stock plus an additional 303 shares of preferred stock and 100 shares of common stock), giving him 52 percent voting control of the corporation. Some time before trial, Denis had acquired the common and preferred shares of his other siblings, which ultimately gave him ownership of 500 common shares and 1,515 preferred shares. 1,300 preferred shares remained with Denis Sr.'s trust and the estate of the mother of Andy, Denis, and their siblings. Denis paid $1 per share for the common shares that he acquired from his siblings.
[269 Or.App. 262] In 2008, Denis, in his capacity as a shareholder of a closely held corporation, brought claims for remedies available under ORS 60.952 and for the imposition of a constructive trust for all of HRI's assets, alleging that Andy had breached his fiduciary duties by, among other things, systematically creating false charges for cattle feed provided by H & H, improperly making account entries in HRI's books, failing to pay any dividends, and borrowing money from HRI and manipulating the company's books to reflect that he had repaid the loan. The trial court did not determine that Denis had proved all of his allegations, but found that Andy, as the controlling shareholder, director, and officer of HRI, " basically treated HRI as his own in the extent of his operation of HRI." Andy also owned H & H, a cattle feed company, and the court found that it " is very clear that he has commingled assets of HRI and H & H and engaged in self dealing." Under ORS 60.952, the trial court set out a number of remedies as provided for in that statute, which included, among other things, that " HRI's articles of incorporation and bylaws shall be amended to remove voting rights from the preferred shares" and that Andy should be removed " from all position of leadership and control in HRI." The court explained in a letter opinion that it was
" extremely concerned about the actions of [Andy] during the course of his control of the corporation and the very evident self dealing and commingling of assets. It is for this reason, that the court is ordering amendment of the bylaws and articles of incorporation and for the removal of [Andy] as controlling the activities of HRI."
The trial court also ordered a money damages award of $195,092.51 for a payment from HRI to H & H, apparently as a loan repayment, although HRI's account books did not properly document the loan. Additionally, the trial court determined that Andy had overpaid himself by $17,178.46 as a constructive dividend and caused a net tax damage to HRI of $14,397.67; it ordered Andy to repay HRI those amounts. We address the specifics of the factual circumstances of the remedies challenged in this appeal and cross-appeal
in the respective sections for each assignment of error.
[269 Or.App. 263] II. DISCUSSION
A. Elimination of voting rights from the preferred shares
Andy first assigns error to the trial court's removal of voting rights from the preferred shares. He argues that ORS 60.952(2)(b) does not permit the elimination of voting rights, the effect of which deprives him of substantial value of his ownership interest in HRI. Although he concedes that ORS 60.952(2)(b) allows the trial court to alter or cancel provisions in the articles or bylaws, it cannot, according to him, do so in a manner that is unlawful. In Andy's view, the removal of voting rights by way of amending the articles of incorporation or the bylaws is the " functional equivalent" of a forced sale of a portion of the property rights associated with corporate shares. Thus, according to him, the stripping of voting rights is essentially a divestiture of his preferred shares, and, therefore, the trial court was required to follow the procedure of ORS 60.952(5), which, as explained in more detail below, provides for a judicially ordered share buyout.
Denis remonstrates that ORS 60.952(2)(b) allows for the remedy crafted by the trial court because, under subsection (2)(b), the trial court has broad powers to change any provision in the articles of incorporation or the bylaws. ORS 60.952(2)(b) provides that " [t]he remedies that the court may order in a proceeding under subsection (1) of this section include but are not limited to * * * [t]he cancellation or alteration of any provision in the corporation's articles of incorporation or bylaws." (Emphasis added.) Denis contends that subsection (2)(b) " does not provide any limitation preventing the trial court from modifying provisions of the articles of incorporation or bylaws that relate to the voting rights of each class of stock." He also contends that the share purchase provision in ORS 60.952(5) is not applicable because there was no court-ordered share purchase and that Andy still owned the same number of preferred shares as he did before the judgment.
[269 Or.App. 264] In addition to his statutory challenge to the trial court's remedy, Andy argues that removal of voting rights from the preferred shares was not a remedy expressly sought in Denis's amended complaint and was, in fact, inconsistent with what Denis did seek: redemption of Andy's preferred shares or, alternatively, purchase of all of Denis's preferred shares. However, Denis requested any of the remedies available under ORS 60.952, so Andy's pleading argument goes nowhere and returns us to a question of what is permissible under the statute. We also find unavailing Andy's argument that stripping voting rights from the preferred shares is only allowed under ORS 60.952(2)(k) and ORS 60.952(5), which provide for a court-ordered purchase of all of a shareholder's shares. The trial court's remedy allows for Andy to retain his preferred shares.
Nevertheless, elimination of voting rights from the preferred shares has the consequence of significantly reducing their value. In a market transaction, shares that do not confer majority control are discounted in value; in other words, they are subject to what is known as a " minority discount," which " recognizes that controlling shares are worth more in the market than are noncontrolling shares." Columbia Management Co. v. Wyss, 94 Or.App. 195, 204, 765 P.2d 207, rev den, 307 Or. 571, 771 P.2d 1021 (1988) (citing Baker v. Commercial Body Builders, Inc., 264 Or. 614, 507 P.2d 387 (1973)). The discount may well be significant. In Columbia Management, Co., for example, the discount was determined by an appraiser to be as much as 33 percent. 94 Or.App. at 198. Specifically here, Andy paid roughly $377,000 for the 3,199 shares that gave him the controlling interest in HRI. In contrast, Denis paid $1 per share for
400 of the voting shares of the common stock of his siblings--the same shares that give him control of HRI under the trial court's remedy. Moreover, stripping voting rights from the preferred shares adds value to Denis's common shares, because the owner of the majority of the common shares ...