How Ya Gonna Keep ’Em Down on the Farm after Baur v. Baur Farms, Inc.? An Analysis and Defense of the 'Reasonable Expectations' Standard for Iowa Oppression Cases

Abstract

Lawmakers and courts in nearly all states, including Iowa, have long recognized that special considerations apply in the closely-held business context because there is no meaningful market available for minority owners who want to sell their interests in the firm. Closely-held business owners, including farmers, can and should address this issue through binding control and buy-sell agreements that comply with Iowa’s business entity statutes, which are intentionally designed to facilitate such plans. But when these contractual planning arrangements are absent, ambiguous, or insufficient, minority owners of farms and other closely-held businesses may find themselves trapped and mistreated by majority owners.

Although the Iowa Supreme Court has repeatedly held that, in closely-held firms, majority owners owe fiduciary duties to the minority, the court’s decisions to date have not clearly defined what those duties require. Nor has the Iowa Supreme Court ever established standards for application of the statutory remedy of judicial dissolution for minority owner “oppression,” a remedy that has been available in Iowa and most other states for decades.

The Baur decision addresses the latter omission, and thereby relieves some of the pressure for further development of Iowa’s fiduciary duty jurisprudence in the closely-held business context. As the article describes, in Baur the Iowa Supreme Court adopted the most widely-accepted definition of oppression: majority shareholder conduct that frustrates the objectively reasonable expectations of minority shareholders. So defined, the oppression inquiry requires courts to consider all relevant facts and circumstances, including not only the majority owners’ legitimate business objectives, but also the interests of minority owners in receiving a return on their investment. The court thereby clarified a well-established statutory remedy and struck a blow for minority owners of closely-held firms.

While some commentators have questioned Baur’s holding, the Article concludes that the Iowa Supreme Court’s decision provides no cause for concern. The court’s oppression definition does not require majority owners of closely-held Iowa enterprises to cede control of those businesses to minority owners or to satisfy minority owners’ subjective beliefs about what constitutes “fair treatment.” Instead, Baur requires majority owners to accommodate minority owner expectations, whether concerning returns on investment or otherwise, only if those expectations are objectively reasonable considering all of the circumstances. Moreover, the court’s decision in no way interferes with Iowa laws that permit closely-held business owners to design their own management arrangements, buy-sell agreements, or estate plans. To the contrary, Baur highlights the advisability of unambiguous advance planning that reasonably accommodates the interests of both majority and minority owners.