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For Lawyers Handling Disputes Between Business Owners, Recent Oregon Court of Appeals Decision is a Must-Read

Since 2001, shareholders in closely held Oregon corporations have had a statutory right under ORS 60.952 to seek remedies in circuit court for certain business conflicts, including corporate deadlock, misconduct by those in control of the corporation, or misapplication of corporate assets.  That statute includes a trap for the unwary, however.  If a shareholder brings such a claim, the corporation or one or more other shareholders can elect to purchase all the shares of the complaining shareholder for the “fair value” of those shares.  ORS 60.952(6).  If the parties cannot agree on fair value, the court decides.  The election, once made, is irrevocable unless the court determines it is equitable to set aside or modify the election.  Closing the stock purchase eliminates the complaining party’s claims.

We are now seeing appellate decisions interpreting various aspects of ORS 60.952(6).  In 2017, the Oregon Supreme Court issued a decision explaining the statute’s purpose of reducing litigation between shareholders in corporations, providing a “shortcut to a remedy.”  Graydog Internet, Inc. v. Giller, 362 Or 177, 196, 406 P3d 45 (2017).  Graydog should be read by any lawyer handling a dispute subject to ORS 60.952.

More recently, the Oregon Court of Appeals issued an opinion addressing two issues in the application of ORS 60.952(6): (1) whether a deadlocked corporation can make the election to purchase the complaining shareholder’s shares; and (2) whether evidence of shares’ fair market value is sufficient to establish the “fair value” of those shares.  On both points, the court answered “yes.”  Hill v. Gold, 322 Or App 324 (2022).

The court’s decision that a deadlocked corporation can make a share-purchase election under ORS 60.952(6) is the most interesting of the two issues.  The court reasoned that it would defeat the purpose of ORS 60.952(6) to prevent a deadlocked corporation from exercising an express statutory right that is meant to remedy the deadlock.  Hill, 322 Or App at 332.  Perhaps, except the statute also allows the other shareholders to make the election on their own behalf.  The practical question is whether the other shareholders, some of whom might be accused of wrongdoing, can cause the corporation to use its resources to buy out the complaining shareholder even if that decision cannot be made by the corporation under its own governing documents (e.g., by an affirmative vote of the Board of Directors).  We have an answer for now, but lawyers representing corporations or shareholders in these circumstances should proceed cautiously until that question is addressed by the Oregon Supreme Court.

On the question of valuation, the court relied on its decisions applying other statutes to conclude that fair market value is relevant to determining the fair value of shares, and that it is appropriate to apply a marketability discount to share value when the complaining party has not proved oppression.  Hill, 322 Or App at 333-36. (The defendants’ valuation expert did not discount the shares for minority control, so the court did not address whether doing so would have been appropriate.)

When representing a shareholder contemplating litigation against the corporation or its other owners, it is critical to recognize the risk of an election under ORS 60.952(6).  The decisions in Graydog and now Hill provide important guidance on how that statute is to be applied, including the counterintuitive conclusion that a corporation can elect to buy out a complaining shareholder without complying with ordinary requirements for corporate decision making.

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