Gries v. Plaza Del Rio Management Corp. – 9/9/2014

September 24, 2014

Arizona Court of Appeals Division One Holds That the Word “Shall” in A.R.S. § 10-1434(E) Is Directory and Not Mandatory, Merely Establishing the Order of Events; Thus, a Court May Discontinue Proceedings on a Shareholder’s Election to Purchase Shares in Lieu of Dissolution If It Would Be Equitable to the Corporation and Shareholders.

Harold Gries and Sharon Harper were equal shareholders of a closely-held corporation, Plaza Del Rio Management Corporation (“PDR”), through entities that each of them controlled.  Their shareholders’ agreement from 1985 included a “shotgun provision” allowing either group to propose a sale price at which it would be willing to buy the shares of the other group or sell its own shares.

In 2011, a dispute between the parties led Gries to sue PDR requesting, among other things, a judicial dissolution of the corporation under A.R.S. § 10-1430(B)(1).  Harper filed an election to purchase Gries’s shares of the corporation in lieu of dissolution under A.R.S. § 10-1434.  The parties were unable to agree on the value of Gries’s shares, and the court held a hearing to determine fair market value, which it set at $157,100.  Gries moved the court to reconsider the valuation ruling and then invoked the shotgun provision of the shareholder agreement, offering to buy Harper’s shares or sell his own shares for $1.5 million.  The court rejected Harper’s argument that Gries could no longer invoke the shotgun provision after the court held its valuation hearing under A.R.S. § 10-1434.  Harper then elected to purchase Gries’s shares for $1.5 million.

The court of appeals affirmed.  A.R.S. § 10-1434(B) states that once an election to purchase shares in lieu of dissolution is filed and the corporation sends out notice, the dissolution proceeding “shall not be discontinued or settled, and the petitioning shareholder shall not sell or otherwise dispose of his shares unless the court determines that it would be equitable to the corporation and the shareholders other than the petitioner to permit this discontinuance, settlement, sale or other disposition.”  (Emphasis added.)  A.R.S. § 10-1434(E) states, however, that “[o]n determining the fair value of the shares [in a hearing under § 10-1434(D)], the court shall enter an order directing the purchase on the terms and conditions as the court deems appropriate . . . .”  (Emphasis added.) 

Harper argued that § 10-1434(E) required the court to direct her to purchase Gries’s shares at the value determined by the court and prohibited Gries from invoking the shotgun provision to avoid that result.  Like the trial court, the court of appeals disagreed with Harper.  The court reasoned that “[a]lthough ‘shall’ may be used in a statute in a mandatory sense, it may also be used in a ‘directory’—permissive—sense if it comports with the statute’s purpose.”  In this case, the word “shall” in § 10-1434(E) “does not mandate the share purchase; it merely establishes the order of events.”  If “shall” were mandatory in this situation, it would eliminate the trial court’s discretion under § 10-1434(B) to terminate dissolution proceedings in another way when equitable.  The court of appeals also concluded that the trial court’s allowing Gries to invoke the shotgun provision was equitable because it respected the parties’ freedom of contract and the provision operated in this case as the parties had intended.

Judge Howe authored the opinion; Judges Thumma and Gemmill concurred.