The full case caption appears at the
end of this opinion. LEWIS, Judge. Since 1955, North Carolina has served as a pioneer and “shining light” in the protection of minority shareholder rights. Robert Savage McLean, Note, Minority Shareholders’ Rights in the Close Corporation under the New NorthCarolina Business Corporation Act, 68 N.C.L. Rev. 1109, 1125-26 (1990) (citing a quote byProfessor F. HodgeO’Neal that appeared in the Charlotte Observer on May 20, 1989). In this appeal, we are asked to re-affirm thattradition of protection by upholding the dissolution of a closely- held corporation, nearly forty percent (40%) of whoseshares have basically been frozen by the controlling shareholders. Defendant Piedmont Electric Repair Company (“PERCO”) is a closely-held corporation engaged in the business ofelectrical contracting work. Defendant Robert G. Draughan (“Buck”) is PERCO’s president and owns fifty-one percent(51%) of the company’s shares. Defendant F.W. Short (“Short”) is the executive vice-president, treasurer, and owner ofone share of PERCO stock. A.G. Draughan (“Glenn”), father of Buck, owned thirty-eight percent (38%) of PERCO’sshares when he died in 1996. All his shares are currently in a testamentary trust that he established for the benefit of hiswife for life and then his four daughters. Plaintiffs serve as trustees of this trust. The third-party defendants own theremaining eleven percent (11%) of PERCO’s stock. Glenn began working for PERCO in 1938 and gradually worked his way up the management ranks within the company.During his tenure, he held positions as vice-president, president, and chairman of the board of PERCO. As of 1992, he,Buck, and Short were PERCO’s three directors, as well as the company’s only stockholders. Beginning in 1992, however,Glenn’s standing in the company began to deteriorate when allegations of sexual harassment were lodged against him.PERCO hired independent counsel to investigate these allegations. Counsel’s report concluded that Glenn hadcommittedvarious acts of sexual harassment. Upon advice of counsel, PERCO thereafter banned Glenn from thecompany’s premises and limited his job duties to only that of a “consultant” at the rate of $15,000 per year.Upon learning of this, Glenn attempted to sell his shares of stock. Just as Dan Short (Glenn’s former partner and Short’sfather) had previously done, Glenn wanted to sell his shares in order to fund his retirement. But pursuant to a shareholderrestriction agreement, the company and all other shareholders had a right of first refusal on any attempted sale of stock.Accordingly, Glenn offered to sell his shares to either PERCO, Buck, or Short for 120% of the company’s book value. Buck and Short, both individually and on behalf of the company, turned down the offer.At a 10 February 1994 shareholder’s meeting, Buck and Short were re-elected as PERCO directors; plaintiff JamesRoyals, Jr. (“Royals”), Glenn’s grandson, was elected as the third director. However, at a directors’ meeting that afternoon,Buck and Short elected themselves as the two-member executive committee that would run PERCO. That same day,PERCO offered to purchase Glenn’s shares for just under half of the company’s book value, an offer that was neveraccepted by Glenn. The following day, PERCO sent Glenn a letter terminating him as vice-president and companyconsultant and informing him he would no longer receive any compensation from the company. Even though Glennremained a thirty-eight percent (38%) shareholder in PERCO and Royals remained one of the company’sdirectors, Buckand Short have conducted all of PERCO’s business since 1994 without consulting either of them. In 1997, Royals attempted to enter PERCO’s premises with an environmental engineer to investigate someenvironmental concerns Glenn had expressed to him before his death. Following this attempt, PERCO banned Royals andall other minority shareholders from its premises. Plaintiffs thereafter filed this action seeking judicial dissolution of PERCOunder N.C. Gen. Stat. � 55-14- 30(2)(ii). From a judgment and order granting plaintiffs’ requested relief, defendants appeal. Section 55-14-30(2)(ii) provides for judicial dissolution of a corporation when “liquidation is reasonably necessary forthe protection of the rights or interests of the complaining shareholder.” If such grounds exist, the decision to dissolve thecorporation is within the trial court’s sound discretion. Foster v. Foster Farms, Inc., 112 N.C. App. 700, 706, 436S.E.2d 843, 847 (1993). We conclude that the requisite grounds exist and that the trial court did not abuse its discretion inordering dissolution.The seminal case with respect to judicial dissolution of closely-held corporations pursuant to N.C. Gen. Stat. �55-14-30(2)(ii) (formerly section 55-125(a)(4)) is Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983). InMeiselman, our Supreme Court outlined the particular dilemma that minority shareholders in closely-held corporationsoften face. Specifically, that court stated: [M]any close corporations are companies based on personal relationships that give rise to certain “reasonableexpectations” on the part of those acquiring an interest in the close corporation. . . .Thus, when personal relations among the participants in a close corporation break down, the “reasonableexpectations” the participants had . . . become difficult if not impossible to fulfill. In other words, when the personalrelationships among the participants break down, the majority shareholder, because of his greater voting power, is in aposition to terminate the minority shareholder’s employment and to exclude him from participation in managementdecisions. Id. at 289-90, 307 S.E.2d at 558. Furthermore, “the illiquidity of a minority shareholder’s interest in a close corporationrenders him vulnerable to [other] exploitation by the majority shareholders.” Id. at 291, 307 S.E.2d at 559. Given theseconcerns, our Supreme Court announced that consideration of the “rights or interests” of the complaining shareholderunder the statute requires analyzing that shareholder’s “reasonable expectations.” Id. at 298, 307 S.E.2d at 563. If thoseexpectations are being frustrated, a court may then consider fashioning appropriate relief to protect those interests,including ordering dissolution. Id. at 300, 307 S.E.2d at 563. Specifically, Meiselman outlines a four-step requirement forrelief under the reasonable expectations analysis. First, thecomplaining shareholder must prove he had one or more substantial reasonable expectations that were known or assumedby the other shareholders. Id. at 301, 307 S.E.2d at 564. Examples of such expectations might include ongoingparticipation in the management of the company or secure employment with the company. Id. at 290, 307 S.E.2d at 558.Second, he must demonstrate that the expectation or expectations have been frustrated. Id. at 301, 307 S.E.2d at 564.Next, the complaining shareholder must show that this frustration of expectations was not the product of his own fault andwas largely beyond his control. Id. Finally, he must show that the specific circumstances warrant some form of equitablerelief. Id. At the outset, defendants contend that the trial court ignored two of these four requirements. Specifically, they argue thatthe trial court focused on what expectations the complaining shareholders had, but never specifically determined whetherthese expectations were reasonable. Moreover, they argue that the trial court never specifically concluded that anyfrustration of these expectations was not the fault of the complaining shareholders. We find these arguments unpersuasive. The trial court specifically determined: 34.The holders of the 385 shares of stock in PERCO, representing approximately 39% of the ownershipinterest therein originally owned by A.G. Draughan, and after his death held by Plaintiffs as executors of his estate, as wellas [certain third- party defendants], had certain reasonable expectations, which are set forth below. These reasonableexpectations, which were known or assumed to exist by Defendants, have been frustrated without the fault of thecomplaining minority shareholders. (Emphasis added). Defendants are correct in pointing out that the bulk of the trial court’s findings are geared towards theother two parts of the Meiselman test. But Finding No. 34 sufficiently demonstrates that the trial court did not whollydisregard the reasonableness and without-fault requirements. We now consider whether the trial court properly applied allfour parts. As stated, the first part of the Meiselman test requires an analysis of the complaining minority shareholders’ reasonableexpectations. The trial court concluded that the various minority shareholders here had six such expectations. These canfairly be subdivided into two categories, financial expectations and management expectations. Each category will beanalyzed below. With respect to the shareholders’ financial expectations, the trial court found the following: (1) all minority shareholderswould have a reasonable opportunity to realize some return on their equity, either in the form of distribution of PERCO’sprofits or purchase of their shares at fair market value; and (2) Glenn would be able to redeem his shares in order to fundhis retirement and/or his estate plan. Defendants contest these findings by pointing out that, at no time in PERCO’s history,had a shareholder ever received fair market value for his shares. As was the case with Short’s father, Dan Short, the shareshad always been purchased at below market value and then subsidized by additional annual compensation from thecompany. Based upon this history, defendantsmaintain the trial court erred by concluding that Glenn and the other minorityshareholders had an expectation of receiving fair market return on their equity. We disagree.Significantly, Meiselman states that a complaining shareholder’s reasonable expectations cannot be viewed in a vacuum;rather they must be examined and re-evaluated over the entire course of the various participants’ relationships and dealings. Meiselman, 309 N.C. at 298, 307 S.E.2d at 563. Furthermore, these expectations are not limited to those memorializedin the by-laws or other written instruments; “[they] must be gleaned from the parties’ actions as well as their signedagreements.” 2 F. Hodge O’Neal & Robert B. Thompson, O’Neal’s Close Corporations � 9.30 (3d ed. 1998) (emphasis added). Here, all along, Glenn had a reasonable expectation of receiving some sort of fair value for his shares of stock. There islittle doubt that Buck and Short both knew of, and concurred in, this expectation. See Meiselman, 309 N.C. at 298, 307S.E.2d at 563 (“In order for plaintiff’s expectations to be reasonable, they must be known to or assumed by the othershareholders and concurred in by them.”) Although Glenn’s initial expectation with respect to fair value might have beenless than book value linked with a subsidized annual compensation or consulting fee, this expectation changed following the10 February 1994 director’s meeting, at which time PERCO cut off Glenn’s compensation altogether. Following thismeeting, defendants cannot claim that the parties had the same expectations as before. Once informed that he would nolongerreceive any compensation from PERCO, Glenn could only reasonably expect that fair value return for his sharesnow meant his shares would be purchased at market value. Thus, the trial court correctly concluded that Glenn had areasonable expectation in receiving fair market value for his shares. However, Glenn is not the only complaining shareholder whose expectations need to be considered. On themanagement side, the trial court concluded that Royals, as one of PERCO’s directors, reasonably expected to have avoice in any business decisions and access to all corporate records. This finding is supported by the evidence. His electionto PERCO’s board of directors by Buck and Short inherently created an expectation that he would be involved inmanagement decisions and have access to corporate records. Accordingly, we also conclude that the trial court properlyfound that Royals had a reasonable expectation in participating in the management of the company. Having concluded that the complaining shareholders had substantial reasonable expectations here, we now proceed tothe second step in the Meiselman inquiry and determine whether these expectations have been frustrated by thecorporation. There is no question that frustration of expectations has occurred here. On the financial expectations side,PERCO has refused to offer fair market value for Glenn’s shares (or any other minority shareholder’s shares for thatmatter). In fact, PERCO essentially continues to hold these shares captive, forcing the minority shareholders to eitherredeem them for significantly less thanmarket value or hold on to them until the majority shareholders decide to dissolve thecompany. On the management expectations side, Royals has been systematically excluded from all involvementwhatsoever in PERCO, notwithstanding that he is one of its directors. And when he did try to exercise some managementof the company by bringing in an environmental engineer to investigate certain environmental concerns, PERCO respondedby permanently banning him from the premises. Next, we consider whether the frustration of these expectations occurred without the fault of the complainingshareholders. This part of the Meiselman test has not to date been developed by our courts. Defendants contend that anyfrustration of expectations came as the direct result of Glenn’s own sexual harassment activities and that, by cutting off hiscompensation, banning him from the premises, and terminating him as an officer, PERCO was merely looking out for itsbest interests. We disagree. By including a fault-based inquiry within the reasonable expectations analysis, Meiselman essentially requires a court toask whether the complaining shareholder’s own conduct was the cause behind the frustration. Thus, in order for fault to bea bar to dissolution, there must be some causal connection between the frustration of the shareholder’s reasonableexpectations and his faulty behavior. For example, a shareholder with an expectation in management cannot seekdissolution based upon a frustration of this expectation if he never learns the business nor attends corporate managementmeetings. Likewise, a shareholder with an expectationin secure employment would be barred from seeking dissolution if heembezzled money from the company. Compare Pooley v. Mankato Iron & Metal, Inc., 513 N.W.2d 834 (Minn. Ct.App. 1994) (upholding trial court’s conclusion that the complaining shareholder’s expectations had been frustrated,notwithstanding his history of assaults and consequent termination) with Exadaktilos v. Cinnaminson Realty Co., 400A.2d 554 (N.J. Super. Ct. Law Div. 1979) (barring dissolution because frustration of the complaining shareholder’sexpectation of participation in management was caused by his own unsatisfactory managerial performance), aff’d percuriam, 414 A.2d 994 (N.J. Super. Ct. App. Div. 1980). We conclude that there was no causal connection between the frustration of the complaining shareholders’ expectationsand Glenn’s faulty behavior here. Although Glenn’s conduct did warrant some penalty with respect to his presence andparticipation in management at PERCO, for purposes of this analysis, any penalty should not have extended to hisrealization of a fair return on his equity in the company. Glenn’s compensation was never tied to any real services he wasperforming for PERCO at that time. Rather, it was only part of the parties’ original arrangement to help fund Glenn’sretirement and/or estate plan in return for a below-market buyout of his shares. Any conduct by Glenn should have in noway affected this wholly separate arrangement. Furthermore, there was certainly no causal connection between Glenn’sconduct and PERCO’s systematic exclusion of Royals from management decisions. This exclusion instead manifests anintent by Buck and Short to controlthe company without any minority shareholder or director input. Accordingly, weconclude that frustration of the complaining shareholders’ reasonable expectations did not result from any fault on theirpart. The last step in the Meiselman test requires us to consider whether dissolution or some other relief is appropriate underthe circumstances. As previously stated, this analysis is addressed to the sound discretion of the trial court. Foster, 112N.C. App. at 706, 436 S.E.2d at 847. We find no abuse of discretion. The evidence strongly suggests that the minorityshareholders have been permanently frozen out of the company, fiscally and physically. Glenn’s shares are currently in atestamentary trust for the benefit of his aging widow. The only way these shares will ever produce any money for her is ifthey are liquidated. But PERCO, in the persons of Buck and Short, has demonstrated no interest in offering a fair returnfor these shares. Furthermore, PERCO has manifested no desire to involve Royals in any management decisionswhatsoever. Under these circumstances, we conclude that judicial dissolution is the only way to safeguard the expectationsof the complaining shareholders here. We do note that the majority shareholders can still prevent dissolution if they opt to purchase the 385 shares held by thecomplaining shareholders. Our statutes specifically provide:In any proceeding brought by a shareholder under G.S. 55-14-30(2)(ii) in which the court determines that dissolutionwould be appropriate, the court shall not order dissolution if, after such determination, the corporation elects to purchasethe shares ofthe complaining shareholder at their fair value, as determined in accordance with such procedures as the courtmay provide. N.C. Gen. Stat. � 55-14-31(d) (1999). After considering an independent appraiser’s report of PERCO’s value, the trialcourt found the fair value of each share to be $635. Defendants have not contested this finding in their brief. Accordingly,defendants can prevent dissolution by purchasing the complaining shareholders’ stock for $635 per share. In their final assignment of error, defendants claim the trial court improperly taxed them the entire cost of theindependent appraiser’s valuation report. We disagree. N.C. Gen. Stat. � 7A- 305(d)(7) specifically allows appraisalcosts to be assessed against a party. The trial court then has discretion whether or not in fact to award these costs. N.C.Gen. Stat. � 6-20 (1999). Its decision is not reviewable absent an abuse of that discretion. Brandenburg Land Co. v.Champion International, 107 N.C. App. 102, 103, 418 S.E.2d 526, 527 (1992). We find no abuse here.Defendants claim that the trial court abused its discretion by ignoring the court’s pre-trial case management order, inwhich the court stated that appraisal costs would be shared by both parties. But that order also specifically stated the courtcould amend any of its provisions when appropriate. The court did so in its final judgment, when it ordered only defendantsto pay the appraisal costs. By doing that which it was specifically empowered to do, i.e., change the terms of the casemanagement order, the trial court cannot be said to have abused its discretion. Accordingly,defendants’ final assignment oferror is without merit. Affirmed. Judges JOHN and EDMUNDS concur.
Royals v. Piedmont Electric Repair Co. NORTH CAROLINA COURT OF APPEALS NO. COA99-609 Filed: 2 May 2000 JAMES ROYALS, JR., and CARL F. BENFIELD, Co-Executors of the Estate of A.G. Draughan, Deceased,Plaintiffs, v . PIEDMONT ELECTRIC REPAIR COMPANY, a North Carolina corporation, ROBERT G. DRAUGHAN, SR., andF.W. SHORT,Defendants, v. NANCY A. DRAUGHAN, JAMES L. ROYALS, JR., Administrator of the Estate of Betsy Draughan Hackler, JUDY DRAUGHAN PHILLIPS, PEGGY DRAUGHAN HULIN, JAMES L. ROYALS, JR. (Individually), ROBERT G.DRAUGHAN, JR., DAVID MICHAEL DRAUGHAN, and STEVEN D. COE,Third-Party Defendants. Appeal by defendants from order and judgment entered 3 March 1999 by Judge Ben F. Tennille in Guilford County Superior Court. Heard in the Court of Appeals 23 February 2000. Wyatt, Early, Harris & Wheeler, L.L.P., by William E. Wheeler, for plaintiff-appellees. Keziah, Gates & Samet, L.L.P., by Jan H. Samet, for defendant- appellant Piedmont Electric Repair Company. Roberson, Haworth & Reese, PLLC, by Robert A. Brinson, for defendant-appellant Robert G. Draughan, Sr. Fisher, Clinard & Craig, PLLC, by Rick Cornwell, for defendant-appellant F.W. Short.
