Gaddy v. Phelps County Bank

Phelps County Bank (Phelps Bank) (defendant) was a private Missouri banking corporation. Phelps County Bancshares, Inc. (Bancshares) (defendant) was a private Missouri holding company that owned 25,856 shares of Phelps Bank stock, which comprised 95.4 percent of the outstanding stock. A majority of Phelps Bank shareholders approved an amendment of Phelps Bank’s articles of agreement to authorize a one-share-for-1,000-shares reverse stock split and increase Phelps Bank’s capital. The amendment prohibited Phelps Bank from issuing any fractional shares. Accordingly, for any shareholders whose interest would be less than one share due to the reverse stock split, the amendment provided for a payment of $560 per share for each share of stock that the shareholders held immediately before the amendment became effective. Certain minority shareholders (the minority shareholders) (plaintiffs), who collectively owned 0.3 percent of Phelps Bank stock, sued Phelps Bank and Bancshares on the ground that the reverse stock split constituted a taking of private property for private use without the consent of the owner in violation of Missouri’s constitution. The parties each moved for summary judgment. The trial court granted summary judgment for Phelps Bank and Bancshares. The minority shareholders appealed, and the appellate court transferred the case to the Missouri Supreme Court. On appeal, the minority shareholders maintained that the reverse stock split constituted an impermissible taking for private use, as opposed to a taking due to public necessity. Additionally, the minority shareholders argued that no Missouri banking statute authorized a reverse stock split, that the reverse stock split violated a Missouri statute prohibiting a bank from purchasing its own stock, and that the trial court’s ruling violated fundamental principles of equity, fair dealing, and shareholder protection.