Trucking firm dispute among brothers results in $70M buyout

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A fraternal dispute that has boiled for years has resulted in what appears to be the largest shareholder buyout case in Minnesota history.

Hennepin County District Court Judge Laurie Miller issued a 94-page order for judgment on May 6 determining that James Koch recover approximately $70 million from Koch Industries (KI) and Stan Koch & Sons Trucking (SKT), where his brothers, Randy and Dave, are the other shareholders.

The Koch case stems from a prior dispute that the owners attempted to resolve in 2005. They’re back in court because that agreement failed. (See sidebar box below.)

The plaintiff is James S. Koch (Jim), and the defendants are Randy G. Koch and Dave H. Koch. (They are brothers, and their first names are used in court documents and here to alleviate confusion.) The Golden Valley-based companies are also defendants separately from the shareholders.

Jim sued for breach of contract and breach of duty of good faith and fair dealing under the 2005 agreement, and he also sought the equitable relief of a fair-value buyout. The jury returned a unanimous $12 million verdict for James S. Koch in July after a two-week trial. The parties then stipulated to a buyout, but that did not end the matter.

According to the order, the brothers are each one-third shareholders of Koch Industries (not the Kansas-based conglomerate of the same name). Jim owns 30.3136% of Stan Koch & Sons Trucking and Randy and Dave each own 34.8432% of SKT.

The crux of the matter came after the verdict when the parties stipulated to a buyout but the amount to be paid was submitted to Miller. It was very much a battle of the experts.

The proposed valuations by the parties’ experts ranged widely. Miller found that KI’s value as of the statutory valuation date was $30 million and SKT’s value $160 million. She did not consider the additional judgment for $12 million (plus interest) and also rejected the argument that Randy and Dave had to receive comparable $12 million payments, which would reduce the companies’ value by some $40,000,000, including interest.

That would be a “significant extraordinary financial event in the life cycle of these companies,” the lawyer for the companies, Brooks Poley told the court after the jury verdict. “We can’t possibly get to fair value without recognizing eight-figure adjustments to the equity values of the company … we are right in the sweet spot of this entire case.” But they did.

2006 settlement agreement

The parties’ current lawsuit was preceded in 2005 by a lawsuit raising similar issues to the current one. That case was not filed but settled in 2006 and is referenced in the current complaint.

The complaint states that in 2005, after financial difficulties in the company and a deterioration of Jim’s relationship with his brothers, Jim wanted to separate his business affairs. The brothers could not reach an agreement.

The 2006 agreement was designed to give him the reasonable expectation of liquidity and reasonable compensation and stock distribution until liquidity was achieved, the current complaint states. It further alleges that Dave and Randy breached the agreement by changing business practices and failing to make payments, depriving Jim of approximately $10 million. At the same time, it is further alleged, Dave and Randy increased payments to themselves and excluded Jim from business operations.

The value to an outside buyer

The court valued the companies as of April 17, 2017, the date the suit was served on defendants, and the presumptive valuation date under Minn. Stat. sec. 302A.751, subd. 2. The court agreed to allow the parties to submit further evidence of the property values but did not allow defendants to reevaluate the company due to the post-trial evidence.

Miller wrote that the plaintiff’s evidence was more compelling. “This difference [in expert opinions] reflects a fundamental divergence in the way these two appraisers viewed their assignment. [Defendant’s expert Ginger Knutsen] valued SKT and KI as they might value themselves, assuming they would continue to carry on their future operations in the way they had in the past. [Plaintiff’s expert Robert Strachota] valued SKT and KI as an outside buyer might value them, by considering how typical companies in the industry would conduct their future operations. … The Court finds that [plaintiff’s  approach, considering how a willing buyer would value these companies, is more consistent [with the] agreed definition of fair market value than Knutsen’s approach, which considers how the companies themselves would continue to operate if no sale of the company occurs.”

She then found that the value of SKT is $160 million and the value of KI is $30 million. Jim owned 30.3136% of SKT, for an award of $48,501,760; he owned 33.33% of SKT for an award of $10 million, for a total of $58,501,760 (plus the $12 million verdict.)  He was awarded attorney’s fees for the breach of contract, and was to submit them in 30 days. The order calls for payment over 12 years at 3.5% interest, with a down payment of 10% of the buyout price, or $5,850,176.

All sides claim victory

The plaintiff’s attorney, Richard Ostlund, commented in an email to Minnesota Lawyer, “The Koch jury and the judge sent a powerful message about fundamental decency and fairness in this $70.5 million plus fees/expenses verdict and final judgement. I am very proud of our entire Anthony Ostlund trial team — Randy Gullickson and I have been trying these cases together for over 35 years; and I am equally proud of the next generation of leading AO trial lawyers who are already continuing and expanding our deep core expertise in complex ownership/fiduciary duty/valuation cases.”

Brooks Poley, attorney for the companies, said that the companies are reviewing their options but did not say they would appeal. The Star Tribune reported that he said that the judge could have ordered a higher valuation which would increase the payouts to Jim, and that the brothers had stipulated to the buyout.

Chris Madel, Dave’s and Randy’s attorney, said in a text to Minnesota Lawyer, “The order is terrific. My clients stipulated to the buyout, they are happy to have Jim out of the business [and] the business is doing fantastic. We intend to send the first check in the next week. We will pay the remainder, pursuant to the judge’s order, over 12 years at 3.5% interest.”