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Cotton v. Expo Power Systems

February 9, 2009

KEN COTTON, PLAINTIFF AND RESPONDENT,
v.
EXPO POWER SYSTEMS, INC., ET AL., DEFENDANTS AND APPELLANTS.



APPEAL from an order of the Superior Court of Los Angeles County, Dzintra Janavs, Judge. Reversed and remanded with directions. (Los Angeles County Super. Ct. No. BC305317).

The opinion of the court was delivered by: Kriegler, J.

CERTIFIED FOR PUBLICATION

In an action against the majority shareholders of a corporation for breach of fiduciary duties, a minority shareholder sought dissolution of the corporation and other relief. The majority shareholders invoked their rights to purchase the minority shareholder's interest under Corporations Code section 2000.*fn1 The trial court obtained an appraisal of the fair value of the shares that did not account for a related derivative action. The trial court confirmed the appraisal and deferred the date of the buyout until after the resolution of the derivative action. On appeal, the majority shareholders contend that the portion of the order deferring the purchase date was not authorized under section 2000. We conclude that a determination of the fair value of the shares of a corporation under section 2000 includes an assessment of the value, if any, of pending derivative actions and their effect on the fair value of the shares. The trial court's order in this case did not comply with the provisions of section 2000, and therefore, must be reversed.

SECTION 2000

When a shareholder brings an action for involuntary dissolution, the corporation can avoid dissolution by purchasing the plaintiff's shares under section 2000, or if the corporation declines, then the holders of 50 percent or more of the voting power of the corporation may purchase the shares.*fn2 The shares must be purchased at their "fair value." (§ 2000, subd. (a).) "Fair value" is defined as "the liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation." (Ibid.) The valuation date is the date that the involuntary dissolution proceeding was commenced, unless the court, upon a showing of good cause, designates another date. (Id., subd. (f).)

If the parties cannot agree on the fair value of the shares, the purchasing party may apply to the trial court to stay the dissolution proceeding and "ascertain and fix the fair value of the shares owned by the moving parties." (§ 2000, subd. (b).) If the purchasing party meets the statutory conditions, the court cannot impose any additional conditions on the purchasing party's right to elect to purchase the shares of the moving party. (Reese v. Darden (1951) 106 Cal.App.2d 699, 701 [interpreting former sections 4658 and 4659, predecessors to section 2000].)

The court must appoint three disinterested appraisers to appraise the fair value of the moving party's shares. (§ 2000, subd. (c).) The order referring the matter to the appraisers prescribes the time and manner of producing evidence, if evidence is required. (Ibid.) Section 2000, subdivision (c) provides: "The award of the appraisers or of a majority of them, when confirmed by the court, shall be final and conclusive upon all parties." However, if the court concludes that the appraisers' award is incorrect, rather than confirm the award, the court must examine the matter de novo and fix the correct value. (Venables v. Credential Ins. Agency, Inc. (1956) 140 Cal.App.2d 724, 727.)

The court must then enter an alternative decree ordering the winding up and dissolution of the corporation unless payment is made "within the time specified by the decree." (§ 2000, subd. (c).) If the purchasing parties do not pay for the shares within the specified time, they are charged with the expenses of the moving parties, including attorneys' fees. (Ibid.) Any shareholder aggrieved by the alternative decree may appeal.

(Ibid.; cf. Dickson v. Rehmke (2008) 164 Cal.App.4th 469, 476 [holding under a similar valuation statute for limited liability companies that the appealable action is the alternative decree].)

FACTS AND PROCEDURAL BACKGROUND

Expo Power Systems, Inc. distributes power systems and battery acid containment products. Plaintiff and respondent Ken Cotton owns one third of the shares of Expo. Defendants and appellant Douglas Frazier and his wife Toni Frazier own two thirds of Expo's shares. Cotton was Expo's primary sales person. Revenues increased from $4.9 million in 1999 to $8.8 million in 2001. During this time, Expo paid substantial royalties to the Fraziers for the use of a patent that Cotton believes is actually owned by Expo. Expo leased office space in a building that was owned by the Fraziers and incurred a debt of $600,000 for tenant improvements. Expo's revenues did not continue to increase. By 2003, Expo could no longer pay rent, and as a result, the Fraziers were unable to pay the mortgage on their property. A sale of the property with the bank's cooperation extinguished all of the obligations of Expo, the Fraziers, and Cotton. The Fraziers and Cotton had a falling out, and Cotton began working for a competitor.

On October 31, 2003, Cotton filed a complaint against Expo, the Fraziers, and the Fraziers' companies-Amber Management Company and Diversified Investments Group, LLC. The complaint alleged that the Fraziers had breached fiduciary duties to Cotton by diverting Expo's assets for their own purposes. Cotton sought a constructive trust, an accounting, declaratory relief, and dissolution of Expo.

On November 12, 2003, Cotton filed a shareholder's derivative action against the same defendants alleging similar causes of action for breach of fiduciary duty, conversion, accounting, and imposition of a constructive trust. The cases were deemed related and assigned to Department 34 of the Los Angeles Superior Court, the Honorable Paul Gutman presiding. Cotton's company, Donlee Consulting Corporation, filed an action against Expo and the Fraziers for breach of contract, open book account, and money loaned based on unpaid consulting fees and loan payments.

On December 31, 2003, defendants filed a notice of election pursuant to section 2000 to purchase Cotton's shares of Expo. On January 7, 2004, defendants filed a motion requesting a stay of dissolution in order to fix the value of Cotton's shares, appoint appraisers, and set bond as required by section 2000. Defendants argued that substantial litigation would be avoided, because the value of Expo would be appraised, including the value of Cotton's derivative claims, and ...


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