Arnaud v. Stockgrowers State Bank of Ashland, Kansas

992 P.2d 216 (1999)

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Arnaud v. Stockgrowers State Bank of Ashland, Kansas

Kansas Supreme Court
992 P.2d 216 (1999)

Facts

The majority shareholders of Stockgrowers State Bank of Ashland, Kansas (Stockgrowers Bank) (defendant), who formed a holding company called Stockgrowers Bank Corp. (the holding company) (defendant), approved a reverse stock split that reduced Stockgrowers Bank’s outstanding shares from 4,000 to 10. The purpose of the reverse stock split was to leave the minority shareholders (plaintiffs) with a fractional share and eliminate the minority shareholders pursuant to a Kansas statute that permitted a corporation to refuse to issue fractional shares if the corporation paid the minority shareholders the fair value of the shares they held before the reverse stock split occurred. Notably, Stockgrowers Bank and the holding company stood to receive substantial tax benefits by gaining control over the minority shareholders’ shares. Stockgrowers Bank and the holding company obtained two appraisals aimed at determining the fair value of the minority shareholders’ shares before the reverse stock split occurred. The appraisals applied minority and marketability discounts. Stockgrowers Bank and the holding company eventually paid the minority shareholders slightly more than the average of the two appraisals. The minority shareholders sued Stockgrowers Bank and the holding company and objected to the valuations. The district-court judge certified the question of whether it was proper for a corporation under these circumstances to apply the minority and marketability discounts in determining the fair value of the minority shareholders’ shares.

Rule of Law

Issue

Holding and Reasoning (Abbott, J.)

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