Jeffrey FRANKS, Michael William Franks, as the Successor Trustee of the Franks Family Trust, and Willis Franks, Plaintiffs-Appellees,
Newell A. FRANKS II, Brian McConnell, Leean McConnell, also known as LeeAnn McConnell, also known as Leann McConnell, David Franks, Lawrence Franks, and Burr Oak Tool, Inc., Defendants-Appellants.
June 5, 2019, at Grand Rapids.
Joseph Circuit Court LC No. 2013-000809-CB.
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Mantese Honigman, PC (by Gerard V. Mantese, Ian M.
Williamson, Douglas L. Toering, Troy, and Fatima M. Bolyea )
Norcross Judd LLP, Kalamazoo (by Christopher E. Tracy ) and
Foley & Lardner LLP, Detroit (by Norman C. Ankers ) for
K. F. Kelly, P.J., and Fort Hood and Redford, JJ.
shareholders' dispute, defendants, Newell A. Franks II,
LeeAnn McConnell, David Franks, Lawrence Franks, and Burr Oak
Tool, Inc., appeal by right the trial court's order
dismissing certain claims, which was entered following an
earlier order granting summary disposition in favor of
plaintiffs — Jeffrey Franks, the Franks Family
Trust, and Willis Franks. Defendants also
challenge the trial court's order compelling Burr Oak to
purchase plaintiffs' shares in Burr Oak. We reverse and
remand for proceedings consistent with this opinion.
late Newell A. Franks founded Burr Oak in 1944. Burr Oak
manufactures and sells machine tools in the heat-transfer
industry. It is located in Sturgis, Michigan. 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.
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.
Burr Oak distributed dividends to its shareholders: Burr Oak
issued dividends every year from 1950 to 2004 with the
exception of five years. In 2001, for example, Burr Oak
distributed $23 per share to holders of Class A stock and $45
per share to holders of Class C stock. Burr Oak paid out
about $2.2 million to shareholders in 2002, and paid out
$2,288,000 in 2003. It distributed another $2.2 million to
shareholders in 2004. However, Burr Oak ceased paying
dividends after the death of Newell A. Franks in 2007. Newell
A. Franks II testified that Burr Oak stopped paying dividends
because the company incurred a "tremendous outflow of
cash" related to his grandfather's estate. He stated
that the company had no formal policy for determining when to
make a dividend distribution. Previously, his grandfather
would just make the decision and it would be carried out.
A. Franks II agreed that he had Gosling calculate the value
of Burr Oak in 2012 in anticipation of a stock buyback. He
agreed that Gosling's report, which was dated May 21,
2012, valued the company at $46,125,355, or at approximately
$598 per share for the 77,043 shares of outstanding stock.
Gosling testified that Newell A. Franks II asked him to
prepare the valuation to help with a proposed buyout of the
"minority shareholders." Newell A. Franks II stated
that Burr Oak had more than $20 million in cash in May 2012.
He indicated that it was not all available for the payment of
dividends but agreed that some could have been used to pay
dividends. He also testified that Burr Oak loaned $1 million
to Sturgis Bank in 2012, and he conceded
that David Franks served on the board of directors for the
bank. David Franks testified that he was a voting shareholder
of the bank.
months after Gosling's valuation, defendants had Burr Oak
offer to purchase plaintiffs' shares for $62 per share.
Newell A. Franks II conceded that there was no valuation to
support that offer. He further acknowledged that Gosling
wrote him and stated that his offer was "a good
plan" because the nonvoting members were astute enough
to realize that their shares had no value unless a different
buyer were to offer them more. Gosling said that he made that
statement to Newell A. Franks II because, "if no
dividends are being paid and there are no redemptions being
made, then nobody else is going to buy the stock." He
explained that Burr Oak was probably the only market for the
shares and that if one cannot convert the stock certificate
into cash in some way, it has no value. David Franks
similarly testified that he knew that the $62 offer did not
have any support, but he agreed to the offer being made with
the understanding that it would get the conversation started.
He also testified that he did not expect anyone to accept
that offer. Newell A. Franks II admitted that no one accepted
the offer of $62 per share. He also admitted that there was
no valuation to support it. He opined, however, that $62 per
share was a fair return given that plaintiffs had paid zero
dollars for their shares.
communications between David Franks and Brian McConnell
suggested that the $62 per share offer to the "outside
stock holders" was not made in good faith. David Franks
wrote that the justification for the offer that Brian
McConnell proposed to provide to Jeffrey Franks after Jeffrey
Franks questioned the basis of the offer should not mention a
related company — Oak Press Solutions, Inc.—
because they had taken measures to ensure that that entity
paid a fair price and he did not want to "plant a
bug" about that company, which itself did not have the
same "ownership concerns." Notably, plaintiffs had
alleged that defendants caused Burr Oak to conduct business
through related entities such as Oak Press Solutions to
receive undisclosed distributions. Newell A. Franks II also
admitted that his grandfather had in the past paid dividends
of $62 per share in a single year. At a February 2013 meeting
of the board of directors, the directors agreed to offer
plaintiffs $141.26 per share. In September 2013, Burr Oak
offered to buy shares at $248 per share. Plaintiffs did not,
however, accept any of these offers.
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. They also alleged a
claim of breach of fiduciary duty and a claim for an
accounting. Plaintiffs filed an amended complaint in October
2013. They alleged seven claims in the amended complaint:
shareholder oppression under MCL 450.1489, breach of
fiduciary duties, accounting, fraud, constructive fraud,
breach of contract, and aiding and abetting the scheme to
deprive plaintiffs of their interests as shareholders.
16, 2014, plaintiffs filed a motion with the trial court
asking it to order
Burr Oak to issue a dividend. In that same month, defendants
moved for summary disposition of plaintiffs' claims under
MCR 2.116(C)(8) and (C)(10). Defendants argued that the trial
court had to dismiss the shareholder-oppression claim because
the conduct at issue did not establish a question of fact as
to whether there was shareholder oppression. Specifically,
they maintained that the failure to purchase stock was not by
itself oppressive conduct and that, similarly, an offer to
purchase stock at a particular price was also not oppressive.
Moreover, they stated, defendants eventually offered to
purchase plaintiffs' shares at $248 per share, which was
the same price earlier offered to Lawrence Franks for his
shares. Finally, they argued and presented evidence that the
board of directors elected not to issue dividends for
legitimate business reasons, which were protected under the
business-judgment rule. Namely, they maintained that Burr Oak
had to retain its profits for capital improvements, to retire
debt, and to possibly redeem stock. Defendants relied, in
part, on Brian McConnell's affidavit. Brian McConnell
averred that he was Burr Oak's chief operating officer
and stated that Burr Oak had to pay out more than $15 million
from 2007 to 2012 to cover obligations under Newell A.
Franks's estate plan. He also stated that the board of
directors felt that Burr Oak needed to establish an ambitious
expansion plan to remain competitive. Defendants additionally
argued that the failure to pay dividends affected all the
shareholders equally and that it therefore could not be
oppressive to plaintiffs. In short, they maintained that
there was no evidence that the board's exercise of
business judgment was feigned or a mere subterfuge. As
pertinent to this appeal, defendants also argued that
plaintiffs failed to state a claim against LeeAnn McConnell
because she was not a director of Burr Oak and did not
participate in any of the decisions at issue.
30, 2014, plaintiffs moved for partial summary disposition on
their claim of shareholder oppression. Plaintiffs maintained
that the undisputed evidence showed that defendants tried to
implement an unfair stock-redemption plan and wrongfully
withheld the payment of dividends for the purpose of
squeezing the nonvoting stock holders out of the corporation.
They argued that the wrongful conduct established as a matter
of law that defendants engaged in shareholder oppression.
They further stated that defendants' admission that they
had an obligation to buy the minority shareholders shares at
fair value, which did not include discounts for marketability
or lack of control, established that the trial court had to
order a buyout at fair value with no discounts.
opposed plaintiffs' motion for partial summary
disposition, arguing that the evidence showed, at the very
least, that whether defendants acted with sound business
judgment when they elected not to distribute dividends was a
contested matter. They also maintained that whether Burr Oak
had sufficient reserves to pay dividends was a contested
matter. They supported their position with another affidavit
by Brian McConnell in which he made averments concerning the
financial condition of Burr Oak during 2012 and 2013 and its
ability to pay dividends.
21, 2014, plaintiffs filed a brief in opposition to
defendants' motion for summary disposition and moved for
summary disposition of their claim for shareholder oppression
under MCR 2.116(I). In part, plaintiffs argued and presented
evidence that LeeAnn McConnell, contrary to her affidavit,
did play a significant role in the management of Burr Oak as
part of the controlling family faction. As for the claim that
defendants had not engaged in
any oppressive conduct, plaintiffs argued that the evidence
showed that defendants implemented an aggressive
stock-redemption program in which they offered an unfair
price after deliberately manipulating and misrepresenting the
fair value of the stock. They made the offer after wrongfully
withholding dividends in order to bully the minority
shareholders into accepting a suppressed value. Plaintiffs
presented evidence that the obligations that Burr Oak had
arising from Newell A. Franks's estate ended in mid-2012
and that Burr Oak had significant cash reserves with which to
both expand its operations and pay a significant dividend.
This evidence, they maintained, showed that defendants did
not withhold dividends for a legitimate reason.
December 1, 2014, the trial court held a hearing on the
various motions that were before it. The trial court started
the hearing by stating that it was denying defendants'
motion for summary disposition because there were
"issues that do suggest that there was infringement of
the minority shareholders[.]" It went on, however, and
stated that it found "infringement of the minority
shareholders' rights." The trial court indicated
that it was unsure what the remedy should be and stated that
it wanted input from an independent expert to determine how
to remedy the situation. The trial court stated that it
wanted the parties to agree on an expert but said that it
would appoint one if they could not agree. The trial court
also stated that it would set a date for a two-day hearing to
address the remedy. When asked to clarify its ruling, the
trial court indicated that it was not granting
plaintiffs' motion "just yet" on the issue of
liability. But it also stated that it was not sure whether
there were issues of material fact regarding plaintiffs'
motion for partial summary disposition. On December 3, 2014,
the trial court entered an order denying defendants'
motion for summary disposition and reserving its ruling on
the remaining motion. As pertinent to this appeal, the court
subsequently instructed the parties to brief an appropriate
remedy for shareholder oppression and indicated that it did
not think that dissolution was a proper remedy.
trial court subsequently held a hearing on October 21, 2016,
to consider plaintiffs' original motion for partial
summary disposition. The trial court surveyed the evidence
indicating that the controlling shareholders were not, in
fact, dealing fairly with the nonvoting shareholders. On the
basis of that evidence, it then found "that there has
been suppression of the minority shareholder[s]." For
that reason, the trial court stated, it would grant
plaintiffs' motion for summary disposition. The trial
court determined that the appropriate remedy was to compel
the corporation to buy the nonvoting members' shares at a
price to be determined after an evidentiary hearing.
Defendants moved for reconsideration in November 2016. As
they had throughout the pendency of the lower-court
proceedings, defendants stated their belief that the trial
court could not find oppression and select a remedy without
holding an evidentiary hearing. The trial court denied the
motion for reconsideration in January 2017.
on the issue of plaintiffs' remedy was held on May 2,
2017. Plaintiffs' expert, certified public accountant
Thomas Frazee, testified generally about his valuation of
Burr Oak. He opined that plaintiffs' shares in Burr Oak
were worth $26,826,736. After Frazee testified, plaintiffs
rested and defendants moved for a directed verdict. They
argued that Frazee's testimony and report were
insufficient to establish the value of plaintiffs' shares
because he did not discount the value for marketability. The
trial court denied the motion. Brian
McConnell, Burr Oak's president and chief operating
officer, testified for the defense and stated that he had
worked for Burr Oak for 26 years. He stated that the three
classes of stock came into being because Newell A. Franks
wanted to create different classes to transfer as gifts for
dividend purposes. The individuals who owned the voting
shares ended up purchasing those shares whereas the other
classes were all gifts. Although they often referred to the
nonvoting shareholders as the "minority
shareholders," the holders of the Class B and C shares
actually owned 52% of the company. Newell A. Franks
established the Class B and C shares in the 1980s so that he
could pay dividends to those whom he gifted Class C shares
without paying himself a dividend as the owner of the Class B
McConnell stated that Newell A. Franks sold his voting shares
for $280 per share in 2006, the year before he died in 2007.
The highest price ever requested for shares of Burr Oak was
$356.22 per share, which was substantially less than the $712
per share calculated by Frazee. Brian opined that the company
was not worth $50 million. He stated his belief that Burr Oak
would be vulnerable if it became highly leveraged. The trial
court, however, precluded him from testifying about the debt
load that Burr Oak might be able to carry. Michael Oliphant
testified on behalf of the defense as an expert certified
public accountant. He opined that plaintiffs' shares were
worth $398 per share. He, however, discounted the shares for
marketability. The mathematical value based on the
company's valuation would be $632 per share.
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.