Opinion
No. X05 CV 09 5013295S
July 20, 2010
MEMORANDUM OF DECISION ON DEFENDANT'S MOTION TO DISMISS #101
Introduction
The plaintiff minority shareholders have brought this action seeking judicial dissolution under General Statutes § 33-896 et seq., claiming that the defendant corporation, Gibbs Wire Steel Company, Inc. (the Company), acted in a manner that was oppressive to the plaintiff shareholders. The defendant moves to dismiss the plaintiffs' complaint on the ground that the court lacks subject matter jurisdiction. Specifically, the defendant contends that the plaintiffs have failed to exhaust certain corporate remedies available to them before bringing suit, as the plaintiffs are seeking the same relief (adequate compensation for their non-voting stock), that is governed by the Company's bylaws. Thus, by failing to exhaust the shareholder remedies available to them before bringing suit, the Company argues that this court is deprived of subject matter jurisdiction over the plaintiffs' claim.
Section 33-896 provides in relevant part: "The superior court for the judicial district where the corporation's principal office or, if none in this state, its registered 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."
Legal Standards
"A motion to dismiss . . . properly attacks the jurisdiction of the court, essentially asserting that the plaintiff cannot as a matter of law and fact state a cause of action that should be heard by the court . . . A motion to dismiss tests, inter alia, whether on the face of the record, the court is without jurisdiction." (Internal quotation marks omitted.) Cox v. Aiken, 278 Conn. 204, 210-11, 897 A.2d 71 (2006); see also Kozlowski v. Commissioner of Transportation, 274 Conn. 497, 501, 876 A.2d 1148 (2005). "The standard governing a trial court's review of a motion to dismiss is well established. In ruling upon whether a complaint survives a motion to dismiss, a court must take the facts to be those alleged in the complaint, including those facts necessarily implied from the allegations, construing them in a manner most favorable to the pleader." (Internal quotation marks omitted.) Davis v. Environmental Commission, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 05 4007475 (January 26, 2007, Tobin, J.).
"The plaintiff bears the burden of proving subject matter jurisdiction, whenever and however raised." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. New London, 265 Conn. 423, 430 n. 12, 829 A.2d 801 (2003). "When issues of fact are necessary to the determination of the court's jurisdiction, [however] due process requires a trial like hearing be held, in which an opportunity is provided to present evidence . . ." (Internal quotation marks omitted.) Gordon v. H.N.S. Management Co., 272 Conn. 81, 92, 861 A.2d 1160 (2004). "Affidavits are insufficient to determine factual issues raised on a motion to dismiss unless . . . they disclose that no genuine issues as to a material fact exists." (Internal quotation marks omitted.) Adolphson v. Weinstein, 66 Conn.App. 591, 594 n. 3, 785 A.2d 275 (2001), cert. denied, 259 Conn. 921, 792 A.2d 853 (2002).
"Subject matter jurisdiction involves the authority of the court to adjudicate the type of controversy present by the action before it . . . [A] court lacks discretion to consider the merits of a case over which it is without jurisdiction . . . The requirement of subject matter jurisdiction cannot be waived by any party and can be raised at any stage in the proceedings . . . If at any point it becomes apparent to the court that such jurisdiction is lacking, the [proceedings] must be dismissed." (Internal quotation marks omitted.) Kizis v. Morse Diesel International, Inc., 260 Conn. 46, 52 (2002). "The burden rests with the party who seeks the exercise of jurisdiction in his favor . . . clearly to allege facts demonstrating that he is a proper party to invoke judicial resolution of the dispute." (Internal quotation marks omitted.) Goodyear v. Discala, 269 Conn. 507, 511, (2004).
"Because the exhaustion [of administrative remedies] doctrine implicates subject matter jurisdiction, [the court] must decide as a threshold matter whether that doctrine requires dismissal of the plaintiff's claim." (Internal quotation marks omitted.) Neiman v. Yale University, 270 Conn. 244, 251, 851 A.2d 1165 (2004). "Under our exhaustion of administrative remedies doctrine, a trial court lacks subject matter jurisdiction over an action that seeks a remedy that could be provided through an administrative proceeding, unless and until that remedy has been sought in the administrative forum . . . In the absence of exhaustion of that remedy, the action must be dismissed." (Internal quotation marks omitted.) D'Eramo v. Smith, 273 Conn. 610, 616, 872 A.2d 408 (2005).
"The doctrine of exhaustion of administrative remedies is well established in the jurisprudence of administrative law . . . The doctrine provides that no one is entitled to judicial relief for a supposed or threatened injury until the prescribed administrative remedy has been exhausted . . . Where a statutory requirement of exhaustion is not explicit, courts are guided by [legislative] intent in determining whether application of the doctrine would be consistent with the statutory scheme . . . Consequently, [t]he requirement of exhaustion may arise from explicit statutory language or from an administrative scheme providing for . . . relief . . . A primary purpose of the doctrine is to foster an orderly process of administrative adjudication and judicial review . . . It relieves courts of the burden of prematurely deciding questions that . . . may receive a satisfactory administrative disposition and avoid the need for judicial review." (Citations omitted; internal quotation marks omitted.) Stepney, LLC v. Fairfield, 263 Conn. 558, 564-65, 821 A.2d 725 (2003).
Facts
The Company was formed in 1956 as the result of a partnership between Charles F. Gibbs (Gibbs), Robert C. Johnson and, to a lesser extent, George Putnam. According to the complaint, the Company has grown into a worldwide leader in the supply and processing of wire and strip, with a network of service centers located throughout the United States and Canada. Upon the Company's founding and consistent with the intent of structuring the ownership in a manner akin to a closed partnership, the Company's original bylaws included a provision 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 before selling to a third party. The bylaws were amended in 1960 to state that any shareholder wishing to sell his shares first had to offer them back to the Company. If the Company was not interested in buying the offered shares, the shareholder then had to offer the shares to the other shareholders. Once these two requirements were met, the shareholder could then offer the shares to a third party.
The Gibbs family owns, and has always owned, a majority of the Company's voting stock. As a result, the Gibbs family, and presently Wayne Gibbs, the Company's majority shareholder, control the Company. Since the Johnson family has never owned a majority of the Company's voting stock, it has never had control over the Company, and as a result, claims to be "at the mercy of Wayne Gibbs and the Company's management." Shortly before the death of Gibbs, the Company's chief executive officer and chairman of the board of directors, the Johnson family made clear to the Company that it wanted to sell its entire stake in the Company, because no member of the Johnson family was working for the Company and the family had no representation on the board of directors. However, although the Johnson family was interested in divesting their position in the Company, they chose not do so because of the Company's long-standing "custom and tradition" of repurchasing a shareholder's shares upon reasonable request at book value, and without resorting to payment over time, as directed by the bylaws. In the aggregate, the plaintiffs own, directly or beneficially, 273,672 shares of the Company's non-voting stock, or approximately forty percent (40%) of the total issued and outstanding stock. As of August 2008, the shares held by the Johnson family were allegedly valued at $17,774,532, using the method which has been traditionally used to determine the net book value per share.
On September 20, 2007, the plaintiffs, with the exception of Charles E. Garris, trustee of the Family Trust, collectively offered the Company all of their voting and non-voting stock, as required by the bylaws. On November 1, 2007, the Company accepted the plaintiffs' offer to sell their voting stock, but declined their offer as to their nonvoting stock. Litigation followed in the United States District Court for the District of Connecticut pertaining to the plaintiffs' offer to sell their voting stock and the defendant's acceptance of that offer. As a result of that litigation, the Company did not purchase the shares until judgment was entered in their favor on April 22, 2009. During the course of the litigation, however, the plaintiffs did not offer their non-voting stock to other shareholders. According to the defendant, if the plaintiffs had offered their non-voting stock to the other shareholders in 2007, and the other shareholders did not purchase those shares by March 18, 2008, then the plaintiffs would have had until September 14, 2008, to sell their non-voting stock to any willing buyer. However, as of result of the plaintiffs' delay in offering their non-voting stock to the other shareholders, the defendant contends that if the plaintiffs now wish to sell their shares, they must follow the provisions outlined in the bylaws and offer the non-voting shares to the Company, then to the shareholders, after which they would be entitled to offer them to any willing buyer.
Gibbs Wire Steel Co., Inc. v. Johnson, Civil Action No. 3:08CV551 (April 22, 2009).
In short, the defendant argues that because the bylaws provide essentially the same relief that the plaintiffs seek, namely, compensation for their non-voting stock, the exhaustion doctrine bars the plaintiffs from seeking relief under § 33-896 until they have first exhausted the remedies contained in the bylaws. In response, the plaintiffs claim that the exhaustion doctrine is not applicable because the bylaws fail to provide steps to be exhausted before a shareholder may seek dissolution of the Company as a result of oppressive conduct, as is alleged here. Further, the plaintiffs argue that the statute itself does not require an oppressed minority shareholder to take any steps before bringing a suit seeking a judicial dissolution.
Discussion
Before addressing the merits of this motion, the court will provide an outline of the allegations in the plaintiffs' complaint. As previously stated, although a majority of the plaintiffs' allegations regarding the defendant's oppressive conduct focus on the events pertaining to the repurchase of the plaintiffs' shares, the plaintiffs also allege oppressive conduct that took on multiple forms. These may be broken down into the following categories: valuations, share repurchases and dividend cuts.
Valuations Share Repurchases
The plaintiffs claim that, historically, the Company had regularly repurchased shares from its shareholders, and it had repurchased those shares at book value, without applying discounts for marketability or minority interest. However, after Gibbs' death, the Company unfairly altered its method of repurchasing shares. This new valuation method included multiple discounts, discounts which artificially depressed the share price. It allowed the Company to offer to repurchase shares at a much lower price.
After Gibbs' death, a valuation of the Company was performed for estate tax purposes. This valuation, conducted by Empire Valuation and completed in 2004 (Empire valuation), applied multiple discounts and valued the Company's stock at a price far below the book value. The Empire valuation established a per share price of $32.60. In 2005, the plaintiffs, concerned with the conclusions reached by the Empire valuation, hired Ireland Associates, LLC, to conduct an independent valuation of the Company (Ireland valuation). The Ireland valuation established a share price of $75.92, as of August 31, 2005, which was more than double the per share price determined by Empire's valuation.
As noted, on December 20, 2006, the Company informed its shareholders that it would repurchase a minimum number of shares on a pro rata basis in early 2007, at a price of $41.86 per share. This price was established by the valuation of the Company performed by Empire for the period ending August 31, 2006, and was significantly below the book value at the time, which was $57.66 per share. This was the first implementation of the new method of share repurchasing that replaced the Company's standard method of repurchasing shares at the book value price. The Company's explanation for offering to repurchase shares at the price established by Empire's 2006 valuation, rather than the book value, was that it was attempting to be fair to all shareholders, namely, those who wanted to sell shares and those who wanted to remain as shareholders.
As minority shareholders, the Johnson family could not challenge the Company's move away from repurchasing shares at book value to repurchasing shares at the much lower valuation price. This left the minority plaintiffs in the position of either selling their stock at a price substantially lower than the book value, or remaining shareholders in the face of diminishing dividend payments. The Johnson family elected not to participate in the share repurchase outlined above, as their independent valuation of the Company established a much higher value for their stock.
After sharing the Ireland valuation with the defendant, the Company simply dismissed its results and stated in a letter to its shareholders that:
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 have 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 the purposes of the current stock buybacks.
Apart from their allegations that the change in repurchasing policy and use of a differing valuation method was oppressive, the plaintiffs also contend that the above letter misled shareholders, as the Company failed to disclose what data utilized in the independent valuation was "questionable," and that the data used by Ireland to reach their independent valuation was primarily the Company's own financial information.
Dividend Cuts
Additionally, at the same time the Company was instituting a new method of calculating the per share price at which it would repurchase shares from shareholders, the Company was also cutting dividends, which was the only economic benefit certain shareholders were realizing from their investments. The plaintiffs contend that this was creating a "lose/lose" situation for its shareholders, as a shareholder was faced with either selling its shares at a price substantially below book value, or remaining on as shareholders in the face of diminishing dividend payments and with no voice in the allocation of the Company's substantial profits.
In December 2003, the Company decided to change 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, payable in five distributions of thirty cents per share. The Company stated that this was expected to be a short-term management adjustment, and hoped that the dividend would return to 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 (EPS). This reasoning, however, was not followed when the Company's EPS rose significantly from 2002-2007. In December 2008, the Company announced that the dividend rate would be further cut from $1.50 per share to $1.25 per share.
The Company generated approximately $100,000,000 in annual sales in 2007 and 2008. For the fiscal year ending August 31, 2007, the company recorded gross sales, exclusive of its Canadian subsidiary, of $100,232,214, gross profit of $16,800,609 and net income of $3,106,113. For the fiscal year ending August 31, 2008, the company recorded gross sales, exclusive of its Canadian subsidiary, of $99,802,527, gross profit of $14,403,197 and net income of $1,657,741.
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 the plaintiffs obtained from the Company. The plaintiffs contend that the defendant intended to put downward pressure on dividend payments in an attempt to "squeeze" the minority plaintiffs out of the Company, by pressuring them to sell their shares at a price substantially below the true fair market value of their shares. In sum, the plaintiffs claim that the Company's unwillingness to repurchase its 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 benefits to its shareholders in other ways, such as through increased dividends. However, this was not so, and as a result of these changes, the shareholders were faced with the "lose/lose" situation as described above.
As previously stated, the bylaws provide that a shareholder wishing to sell his shares must first offer his shares to the Company. If the Company declines to buy the offered shares, the shareholder is then required to offer the shares to the other shareholders. It is only after these two requirements are met that a shareholder can sell his shares to a third party. The defendant contends that because the plaintiffs have not completed the process of offering their shares as prescribed by the bylaws, the plaintiffs have not therefore exhausted the remedies available to them. This failure, the defendant argues, deprives this court of subject matter jurisdiction.
While the defendant is correct in stating that the exhaustion of remedies doctrine applies to a number of different situations where a plaintiff has failed to exhaust internal remedies that would provide the relief sought, the court is not persuaded by the defendant's argument that it lacks subject matter jurisdiction over the plaintiffs' claim because the plaintiffs failed to first follow the provisions in the bylaws pertaining to the sale of their stock. It is true that the bylaws provide a certain mechanism for a shareholder to divest his shares. However, at its core, the plaintiffs' complaint seeks relief from oppressive conduct by the majority shareholders. That alone is enough. A majority of the plaintiffs' allegations regarding the defendant's oppressive conduct focus on the circumstances pertaining to the repurchase of the plaintiffs' shares, and the relief provided by § 33-896 would, in essence, put the plaintiffs in the same position as if they were to sell their shares. However, the statute does not create an obligation for the plaintiffs to follow the bylaw provisions pertaining to the sales of their shares as a condition precedent to bringing suit. Apart from the plaintiffs' allegations of oppressive conduct surrounding the repurchase of the plaintiffs' shares, the plaintiffs additionally allege misconduct in the valuation process used by the defendant, misconduct which directly implicates the fairness of the implementation of the Company's bylaws. Therefore, although the bylaws contain a share repurchase provision, the defendant has not persuaded the court that the bylaws address such a situation like the present. The statute does.
The defendant's reasoning would be more persuasive if the bylaws contained a provision for a minority shareholder to seek relief from such conduct. However, the defendant fails to point to any provision in the bylaws providing remedies for a minority shareholder seeking relief from the allegedly oppressive conduct of the majority shareholders. Additionally, the defendant does not advance the argument that the bylaws themselves contain provisions that a minority shareholder must follow before commencing an action to dissolve the Company. Without such provisions, the court finds there is nothing for the plaintiffs to exhaust before bringing this action pursuant to § 33-896.
The court finds further support for its reasoning when examining the text of the statute. A plain reading of § 33-896 reveals that the statute itself does not require an oppressed minority shareholder to take any steps before bringing a suit seeking dissolution. Section 33-896 provides in relevant part: "The superior court for the judicial district where the corporation's principal office or, if none in this state, its registered 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.
When analyzing the text of a statute, the court is guided by the following well-established principles when interpreting a statute. "In construing a statute, common sense must be used, and courts will assume that the legislature intended to accomplish a reasonable and rational result." (Internal quotation marks omitted.) King v. Board of Education, 203 Conn. 324, 332-33 (1987), quoting Stoni v. Wasicki, 179 Conn. 372, 376-77 (1979). "General Statutes § 1-2z provides: The meaning of a statute shall, in the first instance, be ascertained from the text of the statute itself and its relationship to other statutes. If, after examining such text and considering such relationship, the meaning of such text is plain and unambiguous and does not yield absurd or unworkable results, extratextual evidence of the meaning of the statute shall not be considered." (Internal quotation marks omitted.) Viera v. Cohen, 283 Conn. 412, 421, 927 A.2d 843 (2007). It is clear that Connecticut courts cannot read into legislation provisions that clearly are not contained therein. See Glastonbury Co. v. Gillies, 209 Conn. 175, 181, 550 A.2d 8 (1988) (stating that "it is not the province of a court to supply what the legislature chose to omit. The legislature is supreme in the area of legislation, and courts must apply statutory enactments according to their plain terms.").
If the legislature sought to mandate that oppressed minority shareholders first make an effort to sell shares in the corporation before bringing suit, it would have included such a provision in the statute. As it is not the province of the court to read into clear and unambiguous statutes, provisions that are not contained therein, this court will not read into § 33-896 a requirement that the plaintiffs attempt to sell their shares in the way prescribed by in the Company's bylaws before seeking relief under the statute. The failure of plaintiffs to utilize the bylaw procedures may later become relevant in the balancing of the equities, but recall this is a motion to dismiss.
It is clear that in enacting § 33-896, the legislature sought to protect shareholders of closely held corporations. See 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) (stating "[a]s 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.").
The court in such cases must, therefore, carefully analyze the actions taken by the controlling stockholders. 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. The court must make its own determination whether 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 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's interest. Therefore, in a dissolution action, the court must weigh the legitimate business purposes, if any, and determine whether dissolution is warranted. Viewing the allegations in a light most favorable to the plaintiff, 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 value was at the heart of the Company's plan. While that determination will have to await the evidence, for purposes of this motion to dismiss, the court is satisfied that it does in fact have subject matter jurisdiction over this controversy.
The parties have also raised the prospect of settlement discussions at oral argument on this motion. On that score, the parties should be mindful of the following observation:
"In corporate involuntary dissolution cases, the courts appear to assume that a decree will result in the termination of the business. Perceiving a public interest in the continuation of profitable firms, courts understandably grant dissolution reluctantly and only after considering competing interests in preserving the firm. The concern is misplaced . . . The 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 . . ." (Emphasis added.) Hetherington Dooley, Illiquidity and Exploitation: A Proposed Statutory Solution to the Remaining Close Corporation Problem, 63 VA. L. REV. 1, 27 (1977).
Based on the foregoing, the defendant's argument that the court lacks subject matter jurisdiction to hear this dissolution action is without merit. The defendant's motion to dismiss for lack of subject matter jurisdiction is denied.
IT IS SO ORDERED,