Explore the intriguing case of a Texas car dealership empire and the legal battle that ensued over a controversial stock issuance. Learn valuable lessons in fair dealing and corporate governance.
September 26, 2019
M&A Stories
Introduction:
In the world of a family business, there often comes a time when the founder wishes to pass the torch to their heirs while retaining control. This story is about one such case, with a twist.
The Scenario:
In the heart of Texas, a successful car dealership empire comprising Dodge, Chrysler, and Toyota dealerships was built by a dedicated founder. As he approached retirement, he wanted his son to carry on the legacy. Each dealership operated as a separate limited partnership, and two limited partnerships held the real estate.
The Twist:
Behind the scenes, a corporate entity managed each limited partnership. Interestingly, the son owned all the shares of this management company, but his father held a voting proxy. This setup made the father the sole director and president of the management company. Importantly, the son’s shares had no preemptive rights.
The Deal and Conflict:
A falling out between father and son led to a controversial decision. Just before the founder’s passing, he, as the sole director of the management company, approved the issuance of 1,100 shares to himself for $3.2 million. The price was based on the company’s book value, even though the true value far exceeded that.
The Legal Battle:
After his father’s death, the son discovered this stock issuance and took legal action. He argued that his father, as the sole director, breached his fiduciary duty under Texas corporate law by approving a stock issuance at book value.
The Outcome:
The son succeeded in court. The court emphasized that the transaction could have been legal if it had been fair to the son, even though the father was involved in a self-dealing transaction. However, the court deemed the book value purchase price too low to be fair.
Key Takeaway:
The court criticized the use of book value for such a crucial transaction. It highlighted that a fair market value determination, which would have taken several weeks, should have been pursued. To avoid such legal disputes, one effective approach is to engage an independent valuation consultant with expertise in the specific industry to ensure a credible valuation.
Case Reference:
In the Matter of the Estate of Poe, No. 08-18-00015-CV, Court of Appeals of Texas, Eighth District, El Paso (August 28, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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