Opinion
E077621
07-25-2023
GAMAL F. GHALY M.D., Plaintiff and Appellant, v. RIVERSIDE COMMUNITY HEALTHPLAN MEDICAL GROUP, INC., Defendant and Respondent.
Brower Law Group, Steven Brower and Tae J. Im for Plaintiff and Appellant. Dorsey &Whitney, Kent J. Schmidt and Jill A. Gutierrez for Defendant and Respondent.
NOT TO BE PUBLISHED
APPEAL from the Superior Court of Riverside County No. RIC2000580. Carol A. Greene, Judge. Affirmed.
Brower Law Group, Steven Brower and Tae J. Im for Plaintiff and Appellant.
Dorsey &Whitney, Kent J. Schmidt and Jill A. Gutierrez for Defendant and Respondent.
OPINION
FIELDS J.
I. INTRODUCTION
Plaintiff and appellant Gamal F. Ghaly, M.D. (Dr. Ghaly), held one of 75 outstanding shares of stock in defendant Riverside Community Healthplan Medical Group, Inc., also known as Riverside Physician Network (RPN), a professional corporation and independent practice association comprised of physicians engaged in the practice of medicine. In 2019, RPN merged with another entity and became a wholly owned subsidiary of NAMM Medical Holding, Inc. (NAMM). NAMM paid RPN $18 million for RPN.
Before the merger, RPN notified its 75 shareholders of the terms of the proposed merger and that RPN would be paying $12,082,500 of the $18 million purchase price for RPN as "transaction bonuses" to RPN's directors, certain officers, and some of RPN's physicians. The rest of the $18 million purchase price, less merger expenses, was to be distributed pro rata to RPN's 75 shareholders. RPN estimated that each RPN shareholder would receive an initial payment of around $30,000, plus an additional payment of around $40,000, after two years, from amounts held for litigation and other expenses. Dr. Ghaly did not receive a transaction bonus and was the only RPN shareholder who did not approve the merger.
In February 2020, Dr. Ghaly filed a first amended complaint (FAC) in this action against RPN and the four members of the executive committee of RPN's board of directors (the board defendants). In four common law causes of action, the FAC alleged that RPN and the board defendants breached their fiduciary duties to RPN's shareholders in distributing the $12,082,500 in transaction bonuses. In a fifth cause of action against RPN, Dr. Ghaly sought an appraisal of the value of his RPN share pursuant to the dissenters' rights statutes. (Corp. Code, §§ 1300-1313.) Dr. Ghaly alleged that his RPN share was worth over $400,000.
Undesignated statutory references are to the Corporations Code.
In August 2020, the trial court sustained the board defendants' and RPN's general demurrers to the FAC's common law claims, without leave to amend, and dismissed the board defendants from the action, with prejudice. In a prior appeal, this court affirmed the judgment dismissing the board defendants and the common law claims against RPN, on the ground the common law claims were barred by the dissenters' rights statutes and could be addressed in connection with Dr. Ghaly's fifth cause of action for an appraisal of the fair market value of his RPN share. (Ghaly v. Uppal (Mar. 4, 2022, E075927) [nonpub. opn.] (Ghaly I), applying Steinberg v. Amplica, Inc. (1986) 42 Cal.3d 1198, 1209-1210 (Steinberg).)
RPN filed an answer to the FAC, alleging as an affirmative defense that Dr. Ghaly's dissenters' rights or appraisal claim was barred by section 310. Section 310 allows a party asserting the validity of a "contract or other transaction" between a corporation and one or more of its directors-a transaction tainted by a director's conflict of interest-to validate the transaction by showing that the transaction was "just and reasonable as to the corporation" at the time the transaction was authorized, approved, or ratified. (§ 310, subd. (a)(3).) RPN moved for a bifurcated trial on its section 310 defense, and the motion was granted over Dr. Ghaly's opposition. (Code Civ. Proc., § 598; Cal. Rules of Court, rule 5.390.)
After granting the bifurcation motion, the court denied RPN's motion for summary judgment on its section 310 defense, on the grounds there were material issues of fact concerning whether section 310 applied to the merger transaction and, if so, whether the requirements of section 310 were satisfied.
Following a one-day court trial on RPN's section 310 affirmative defense, the court ruled that section 310 barred Dr. Ghaly's appraisal claim. Dr. Ghaly stipulated that the $18 million purchase price for RPN was an adequate price; he claimed only the $12,082,500 in transaction bonuses were void or voidable based on the RPN directors' conflicts of interest in approving them. (§ 310, subd. (a).) He claimed his RPN share was worth around $240,000, or 1/75 of the $18 million purchase price, without deduction for the $12,082,500 in transaction bonuses. The trial court concluded that the transaction bonuses were valid notwithstanding the RPN directors' conflicts of interest in approving them, because RPN met its burden of showing that the bonuses were "just and reasonable" to RPN. (§ 310, subd. (a)(3).)
In this appeal from the judgment in favor of RPN, Dr. Ghaly claims for multiple reasons that section 310 did not apply to or bar his appraisal claim that RPN undervalued his share. (§§ 1300-1313.) We find no merit to Dr. Ghaly's claims. We further conclude that any trial court error in holding a bifurcated trial on the section 310 defense, or in concluding that the defense barred Dr. Ghaly's appraisal claim, did not prejudice the appraisal claim. There is no reasonable probability Dr. Ghaly would have realized a more favorable result had the section 310 defense not been bifurcated.
The entire basis or gravamen of Dr. Ghaly's appraisal claim-his claim that RPN undervalued his share-was that the $12,082,050 in transaction bonuses was void or voidable based on the RPN directors' conflicts of interest in approving them. But the entire record shows that the transaction bonuses were fair and reasonable to RPN and to all of RPN's shareholders, including Dr. Ghaly. In a nonbifurcated trial on the appraisal claim, Dr. Ghaly would have been unable to show that RPN undervalued his share by approving and distributing the $12,082,050 in transaction bonuses.
II. ADDITIONAL BACKGROUND
A. The Dissenters' Rights Statutes, Relevant Provisions
The dissenters' rights statutes (§§ 1300-1313) apply when the approval of a corporation's outstanding shares (§ 152) is required for certain corporate reorganizations (§ 1300, subd. (a).) By complying with the statutes, a shareholder who dissents to the reorganization may require the corporation to purchase the shareholder's "dissenting shares" for cash at their fair market value, "determined as of the day of, and immediately prior to, the first announcement of the terms of the proposed reorganization ...." (Ibid.)
"If the corporation denies that the shares are dissenting shares, or the corporation and the shareholder fail to agree upon the fair market value of the shares, then the shareholder demanding purchase of such shares as dissenting shares or any interested corporation . . . may file a complaint in the superior court . . . praying the court to determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both ...." (§ 1304, subd. (a).) "If the fair market value of the dissenting shares is in issue, the court shall determine, or shall appoint one or more impartial appraisers to determine, the fair market value of the shares." (§ 1304, subd. (c).)
Under section 1312, subdivision (a), a dissenting shareholder-one who has the right to demand payment of cash for dissenting shares-"may not attack the validity" of the reorganization, or have the reorganization set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor of the reorganization. (Steinberg, supra, 42 Cal.3d at p. 1207;§ 1312, subd. (a).) Steinberg interpreted section 1312, subdivision (a), as limiting dissenting shareholders to recovering the fair market value of their dissenting shares in an action for an appraisal of the shares. (Steinberg, supra, 42 Cal.3d at pp. 1206-1214; §§ 1304.) Thus, Steinberg held that a dissenting shareholder may not recover additional damages above the fair market value of the dissenting shares, from either the corporation or its directors and officers, for breaches of fiduciary duties or other misconduct, when the misconduct is based on facts disclosed to the shareholders before the shareholders voted to approve the reorganization. (Id. at pp. 1206-1210.) Steinberg explained: "The threat of such litigation could, like an action to set aside a merger, prevent the consummation of reorganizations which would benefit the majority and the corporation as a whole," and an "appraisal is as adequate a remedy for a shareholder who bases his claim of undervaluation on breach of fiduciary duty as to one who argues that his shares were undervalued due to a good faith dispute of their worth, provided that the issue of misconduct may be litigated in an appraisal proceeding." (Id. at pp. 1209-1210.)
B. Dr. Ghaly's Appraisal Claim
In Ghaly I, this court concluded that Dr. Ghaly's rights as a dissenting shareholder to RPN's merger with NAMM were limited to recovering the fair market value of his RPN share from RPN (§§ 1304, 1312), and that Dr. Ghaly's breach of fiduciary duty and other misconduct claims against RPN and the board defendants (the four members of the executive committee of RPN's board) had to be adjudicated in determining the value of Dr. Ghaly's RPN share (Ghaly I, supra, E075927). Following Steinberg, we explained: "Dr. Ghaly may vindicate his misconduct claims against defendants for breach of fiduciary duty and constructive fraud, based on defendants' decision to distribute the $12,082,500 in bonuses, through his fifth cause of action" for an appraisal of his RPN share, against RPN. (Ibid; Steinberg, supra, 42 Cal.3d at pp. 1209-1210.)
C. Section 310
Section 310 presents standards for adjudicating the validity of a contract or other transaction between a corporation and one or more of its directors, or between the corporation and an entity in which a director has a material financial interest. (§ 310, subd. (a).) Such a contract or transaction, which is said to be "tainted" by a director's conflict of interest, is neither "void nor voidable because" the interested director or directors, or the contracting entity in which the director has a material financial interest, are parties to the transaction, or are present at the meeting of the board or a committee of the board which authorizes, approves, or ratifies the transaction, if one of three conditions are met:
(1) the corporation's shareholders approve the transaction, in good faith, based on full disclosure of the transaction and the directors' or other entity's interests in the transaction, "with the shares owned by the interested director or directors not being entitled to vote" on the approval, or
(2) the corporation's board of directors, or a committee of the board, approves the transaction, in good faith, based on full disclosure of the transaction and the directors' or other entity's interests in the transaction, "without counting the vote of the interested director or directors and the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified," or
"(3) As to contracts or transactions not approved as provided in paragraph (1) or (2) of this subdivision, the person asserting the validity of the contract or transaction sustains the burden of proving that the contract or transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified." (§ 310, subd. (a).)
Section 310 provides: "(a) No contract or other transaction between a corporation and one or more of its directors, or between a corporation and any corporation, firm or association in which one or more of its directors has a material financial interest, is either void or voidable because such director or directors or such other corporation, firm or association are parties or because such director or directors are present at the meeting of the board or a committee thereof which authorizes, approves or ratifies the contract or transaction, if: [¶] (1) The material facts as to the transaction and as to such director's interest are fully disclosed or known to the shareholders and such contract or transaction is approved by the shareholders (Section 153) in good faith, with the shares owned by the interested director or directors not being entitled to vote thereon, or [¶] (2) The material facts as to the transaction and as to such director's interest are fully disclosed or known to the board or committee, and the board or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the interested director or directors and the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified, or [¶] (3) As to contracts or transactions not approved as provided in paragraph (1) or (2) of this subdivision, the person asserting the validity of the contract or transaction sustains the burden of proving that the contract or transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified."
D. The Court Trial on RPN' s Section 310 Affirmative Defense
A one-day court trial on RPN's section 310 affirmative defense was held on April 12, 2021. The parties stipulated to 23 facts. RPN called three witnesses, the former chairman of RPN's board of directors, Ramesh Karody, M.D. (Dr. Karody); former RPN employee, Theresa Earwood; and Dr. Ghaly. Dr. Ghaly did not present any affirmative evidence.
An affirmative defense is "new matter constituting a defense." (Cal. Code Civ. Proc., § 431.30, subd. (b)(2).) Black's Law Dictionary defines an affirmative defense as" '[a] defendant's assertion of facts and arguments that, if true, will defeat the plaintiff's or prosecution's claim, even if all the allegations in the complaint are true.'" (Morris Cerullo Evangelism v. Newport Harbor Offices & Marina, LLC (2021) 67 Cal.App.5th 1149, 1158; Black's Law Dict. (11th ed. 2019) p. 528, col. 2).) In general, a defendant asserting an affirmative defense has the burden of pleading and proving the facts constituting the defense. (Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2022) ¶ 6:431, p. 6-133 ["[A]ny issue on which defendant bears the burden of proof at trial is 'new matter' and must be specially pleaded in the answer."]; id. at ¶ 6:435, p. 6-134.)
1. Stipulated Facts
Before the 2019 merger with NAMM, RPN was an independent practice association (IPA) through which its participating physicians engaged in the practice of medicine. Dr. Ghaly was a licensed physician practicing in Riverside. In 1996, Dr. Ghaly entered into a "primary care professional services agreement," through which he agreed to be a "nonexclusive provider" for RPN, and a "subscription agreement" through which he acquired a single share of RPN stock for $500. These agreements were still in effect at the time of the 2019 merger.
In 2019, RPN entered into a "merger transaction" to be acquired by NAMM for approximately $18 million. The $18 million purchase price was a fair price for RPN. NAMM did not "dictate" to RPN how the $18 million purchase price would be allocated. RPN's board of directors "elected to allocate $12,082,500 of the $18,000,000 purchase price to a pool of bonuses." Dr. Ghaly did not receive a bonus as a result of the merger transaction.
Until the 2019 merger, Dr. Ghaly was a nonexclusive provider for RPN, meaning he was free to earn income from medical services through entities other than RPN. Dr. Ghaly earned "the majority" of his income from medical services from sources other than RPN. Dr. Ghaly never assumed any responsibilities relating to the management of RPN or preparing RPN to be acquired. At the time of the merger, there were 75 RPN shareholders including Dr. Ghaly, and each held a single RPN share. All of RPN's 75 shareholders, except Dr. Ghaly, signed written consents approving the merger. Dr. Ghaly was RPN's only dissenting shareholder.
On February 13, 2019, Dr. Ghaly attended a shareholder meeting where the merger transaction was discussed. At the meeting, Dr. Ghaly asked if he could become an exclusive RPN provider. Dr. Ghaly was provided with a copy of the "merger proposal" before the shareholders voted on the merger, but he did not read the entire merger proposal before he decided not to approve the merger transaction. Even if he had been provided more information about the merger transaction, Dr. Ghaly would have objected to the merger transaction.
2. RPN Before the Merger
RPN was formed in the 1980s. Dr. Karody, a physician specializing in internal medicine, became affiliated with RPN in 1992. He became an RPN director in 1998, and was the chairman of RPN's board of directors for 16 to 17 years, until RPN merged with NAMM in 2019. Dr. Karody also served on the executive committee of RPN's board of directors at the time the merger was approved.
Around 2017, RPN's board began exploring merger options. RPN was having difficulty with its contracts with patient health care plans; some health care plans had terminated their contracts with RPN, and some had put RPN on probation. RPN also needed additional capital to invest in electronic health records, marketing, and other things. Had RPN not merged with NAMM, Dr. Karody believed RPN would have "collapsed" and gone into bankruptcy within a year or two.
Dr. Karody explained how a physician could become an RPN service provider: by completing an application and, if approved, signing a professional services agreement with RPN. Under the services agreement, the physician could choose to be an exclusive or a nonexclusive RPN physician. Exclusive RPN physicians were "committed" to RPN and "could only get patients" who "opted through [RPN], whereas the nonexclusive physicians had . . . multiple sources of income from different physician groups." Nearly 95 percent of RPN's physicians were exclusive RPN physicians. Primary care providers tended to be exclusive RPN physicians. Most specialists were nonexclusive; there were limited numbers of specialists, and they tended to serve different physician groups.
Dr. Karody also explained how an RPN physician, exclusive or nonexclusive, could acquire an RPN share. After the physician worked for RPN for a time, they could apply to RPN's board to become an RPN shareholder. If approved, the physician could purchase a single, nontransferable RPN share from RPN for $500, pursuant to a subscription agreement with RPN.
Under a separate buy/sell agreement, the physician agreed to sell, and RPN agreed to redeem or purchase the share from the physician for its $500 purchase price, upon the death of the physician or if the physician's services agreement with RPN was terminated for any other reason. The shareholder could not sell or transfer his or her share to anyone other than RPN, including another RPN shareholder. The $500 redemption price was in effect from 1996 through the time of the 2019 merger. During that time, no physician who left RPN was paid more than $500 for the physician's RPN share. Limiting each RPN shareholder to one share of RPN stock ensured that all RPN shareholders had "equal representation" in electing members of RPN's board of directors.
Through the time of the merger, RPN had never declared or paid a dividend on its shares. Instead, each year RPN had a practice of distributing its profits to its physician providers, including its nonshareholder physicians, in the form of bonuses. The bonuses were based on a formula that depended on several factors: whether the physician was a primary care provider or a specialist; was exclusive or nonexclusive; participated in committees; and the physician's number of patients, patient utilization, and patient evaluations. Primary care and exclusive physicians tended to receive higher bonuses than specialists and nonexclusive physicians.
RPN's practice of paying its annual profits as bonuses rather than as dividends to its shareholders was never controversial among RPN's shareholders. The annual bonuses were "based on the demands of the physicians," and the physicians "accepted the bonuses as fair." Any RPN physician could discover the amount of bonuses paid to other RPN physicians by examining records at RPN's offices.
In 1996, Dr. Ghaly, an internal medicine specialist, became a nonexclusive RPN physician, purchased a single RPN share for $500, and signed a subscription agreement and a buy/sell agreement with RPN. In 2013, Dr. Ghaly signed a nonexclusive services agreement with RPN, replacing his 1996 nonexclusive services agreement with RPN. Dr. Ghaly was a nonexclusive RPN physician from 1996 until the 2019 merger.
3. The Merger
The merger required the approval of RPN's board of directors and 95 percent of RPN's shareholders. RPN's board voted unanimously to approve the merger. In February 2019, the merger was submitted to RPN's 75 shareholders for their written approval, and all of the shareholders, except Dr. Ghaly, signed written consents approving the merger. The merger closed and became effective on March 1, 2019. On that date, RPN became a wholly owned subsidiary of NAMM.
There were three parties to the merger: NAMM, Riptide Merger Sub, PC, and the "Representative" of RPN shareholders, comprised of the board defendants and RPN shareholders, Drs. Karody, Sindher, Allison, and Uppal. In the merger, Riptide, a wholly owned subsidiary of NAMM, merged into RPN and lost its separate existence, but RPN survived the merger and became a wholly owned subsidiary of NAMM.
Before RPN's shareholders approved the merger, the shareholders were given a written "merger proposal" including an "information statement" and "questions and answers" about the merger explaining the terms of the merger and the board's decision to distribute $12,082,500 of the $18 million as transaction bonuses. Under the merger proposal, the $18 million purchase price for RPN was to be allocated among three recipients: (1) the costs and expenses of the merger (e.g., legal and financial advisor fees), (2) the $12,082,500 in transaction bonuses, and (3) shareholder equity, estimated at the time of the merger to total $70,000 to $74,000 per share, net of merger expenses and the transaction bonuses.
4. The Transaction Bonuses
The merger proposal sent to RPN's shareholders stated that RPN's board of directors had "approved transaction bonuses totaling $12,082,500 to be paid to certain RPN service providers (including some Securityholders [(i.e., RPN shareholders)]), officers and directors upon completion of the Merger. The bonuses are being paid in recognition of efforts of the recipients in getting RPN to a position to be acquired. The amounts of the bonuses vary based on a number of factors, including whether the recipient is an exclusive or non-exclusive provider, whether the recipient is a primary care physician or a specialist, and the years of service such recipient has provided to RPN. The majority of the bonuses ($7,725,000) are being paid to Primary Care Physicians."
The merger proposal also stated that each RPN director would receive a $35,000 bonus, in addition to any bonus the director would receive as an RPN physician. The directors who served on the executive committee of the board (Drs. Karody, Sindher, Allison, and Uppal) were to receive additional $15,000 bonuses. RPN's CEO (Mr. Saner) was to receive a $200,000 bonus, RPN's CFO (Mr. Snowden) was to receive a $250,000 bonus, and the CEO and CFO were to enter into employment agreements with NAMM. Dr. Karody testified that the directors' bonuses were "fair" because the directors had taken time away from their practices to "make [the merger] successful."
All of the transaction bonuses were paid when the merger closed. Apart from the statement that $7,725,000 of the $12,082,500 in transaction bonuses would be paid to primary care physicians, the merger proposal did not disclose which RPN physicians would receive transaction bonuses or in what amounts. But any RPN shareholder could have obtained that information at RPN's offices before voting on the merger. The transaction bonuses to RPN's physicians were based on the same formula that RPN's board had customarily used to calculate and distribute RPN's annual profits as annual bonuses to RPN's physicians, except that some RPN physicians who were not RPN shareholders received a transaction bonus.
According to Dr. Karody, the merger would not have occurred unless the board had paid transaction bonuses to the RPN physicians who "participat[ed]" in RPN's "dayto-day success." RPN's principal asset was the goodwill of its physicians' practices. RPN had no real estate, intellectual property, or other assets of significant value. NAMM was paying the $18 million purchase price to acquire the goodwill of RPN's physician practices.
Thus, the "full participation" of RPN's physicians was critical to the success of the merger. As a condition of the merger, NAMM required all RPN shareholders (the 95 percent who approved the merger) to sign noncompetition and nonsolicitation agreements with NAMM to ensure that the former RPN shareholders would not "channel" RPN patients to physician groups other than NAMM. As a further condition of the merger, NAMM required certain RPN physicians to sign "exclusive p[rimary] c[are] p[rovider] amendments" with NAMM, ensuring that NAMM retained these RPN physicians as exclusive physicians.
5. RPN's Estimated Value of Each RPN Share
The merger proposal explained that each RPN shareholder would receive around $70,000 to $74,000 for their RPN share, comprised of an initial payment of around $30,000, plus an additional payment of around $40,000 after two years. The estimated additional $40,000 payments were to be an equal, 1/75 share of funds totaling $3,250,000, which were being held to pay claims and expenses arising after the merger. Any claims on the $3,250,000 sum would reduce the additional per share payments. After the merger closed, each shareholder, except Dr. Ghaly, received an initial payment of $34,140 for their RPN share. At the time of trial in April 2021, no part of the estimated additional $40,000 payments had been paid to RPN shareholders.
6. Dr. Ghaly's Testimony
At the February 13, 2019, shareholder meeting, Dr. Sindher chaired the meeting and told the shareholders they would each receive $50,000 for their RPN share. When asked what RPN was doing with the rest of the $18 million, Dr. Sindher said it was being distributed pursuant to a "confidential formula." Dr. Ghaly agreed that $18 million was a fair price for RPN, but he dissented from the merger because he believed he should receive more than $50,000 for his RPN share.
Dr. Ghaly testified that he did not ask whether he could become an exclusive RPN provider at the February 13, 2019 meeting, despite his stipulation that he did. But whether Dr. Ghaly asked the question at the meeting has little to no relevance to the trial court's decision or the issues in this appeal.
Dr. Ghaly never expected to be paid dividends on his RPN share, and he never objected to RPN's practice of distributing its annual profits as bonuses to its shareholders. In some years, he received an annual bonus, but he did not receive a transaction bonus in connection with the merger. He believed that each RPN share was an "equal" share, and each RPN shareholder should have received the same amount for their share regardless of whether the shareholder was a primary care physician or a specialist, or an exclusive or nonexclusive RPN physician. Thus, the $18 million purchase price for RPN, less the costs and expenses of the merger, should have been divided equally among RPN's 75 shareholders. Each RPN shareholder should have received around $240,000, or $18 million divided by 75.
7. The Trial Court's Findings and Conclusions
In a detailed statement of decision, the court concluded that section 310 applied, that RPN had shown that the requirements of section 310 were satisfied, and that section 310 was "a complete defense" to Dr. Ghaly's appraisal claim. In relevant part, section 310 allows a party asserting the validity of a "contract or other transaction" between a corporation and one or more of its directors-a transaction tainted by a director's conflict of interest-to validate the transaction, or show that the transaction was not void or voidable-by showing that the transaction was "just and reasonable as to the corporation." (§ 310, subd. (a)(3).)
The court rejected Dr. Ghaly's claim that section 310 did not apply to the merger transaction because Dr. Ghaly was asserting a dissenters' rights claim for an appraisal of his RPN share (§§ 1304, 1312), and he was not seeking to "void" the merger (§ 310, subd. (a)). The court ruled that section 310 applied "given the gravamen of the legal theories" Dr. Ghaly was advancing in support of his claim that RPN had undervalued his RPN share. Dr. Ghaly was claiming that RPN had undervalued his share by distributing $12,082,500 of the $18 million purchase price for RPN to the transaction bonuses rather than to shareholder equity. The court noted it had previously ruled that "any legal theories a dissenting shareholder has that implicitly impact the share value are subsumed in the statutory appraisal remedy." (Steinberg, supra, 42 Cal.3d at p. 1209.) Thus, the court reasoned "it would be untenable to allow [Dr. Ghaly] as a shareholder to assert claims for breach of fiduciary duties and management self-dealing and not allow RPN to assert section 310 as a defense."
The court also rejected Dr. Ghaly's claim that section 310 did not apply because it conflicted with the dissenters' rights statutes (§§ 1304, 1312), and the dissenters' rights statutes were more specific on the question of Dr. Ghaly's right to an appraisal of the value of his RPN share. The court concluded that the dissenters' rights statutes did not conflict with section 310. Rather, the dissenters' rights statues provided "the exclusive mechanism for dissenting shareholders to assert their rights and the exclusive remedy (appraisal)"-similar to "the procedures and requirements" for bringing a shareholder derivative action. The dissenters' rights statues provided "a streamlined process for assessing the value of the dissenting shares, regardless of the basis for the shareholder's objection to the merger."
Turning to RPN's evidentiary showing in support of its section 310 defense, the court found there were five reasons why the "merger transaction," including the RPN directors' decision to allocate $12,082,500 of the $18 million purchase price for RPN to the transaction bonuses, was "just and reasonable as to [RPN]." (§ 310, subd. (a)(3).) First, the court found that the goodwill of RPN's physician practices was "essential" to the merger transaction. The court noted that "a principal focus of the merger transaction was ensuring that the physicians would continue their practices-including physicianpatient relationships-after the closing. RPN had little else to deliver to NAMM in return for $18 million."
Second, the transaction bonuses were consistent with RPN's decades-old practice of distributing its profits "based on individual physicians' performances and contributions" to RPN, not based on the physician's ownership of shares. Third, the transaction bonuses were consistent with the buy/sell agreement, whereby Dr. Ghaly agreed that his RPN share would be valued at the $500 he paid for it unless RPN subsequently revalued it, which never happened. The court found that RPN's decision to pay each RPN shareholder approximately 150 times his or her initial $500 investment, net of the transaction bonuses, "was a good faith determination by the Board that was just and reasonable to the corporation."
Fourth, the shares had "no value on the open market," and they could not be sold. RPN's directors could "properly consider the lack of marketability of the share[s] in assigning a value to the shares while considering the separate value of RPN's good will." Given the shares' lack of marketability, the decision to allocate as much as $75,000 per share was just and reasonable as to RPN.
Fifth, the merger transaction would not have closed had it not been structured to include the transaction bonuses. The court was "persuaded by Dr. Karody's testimony that the only way to induce RPN physicians to continue with RPN-and thereby deliver the good will of RPN to NAMM and close the transaction-was to award merit-based bonuses consistent with prior periodic bonuses." Dr. Ghaly's claim that the merger consideration should have been evenly divided among RPN's 75 shareholders "would have disregarded the good will component of the transaction" by awarding each shareholder the same amount for contributing to RPN's goodwill "when, in fact, each shareholder's performance differed and a substantial component of the practice's good will" was attributable to non-shareholder physicians."
8. Judgment and Appeal
Following its statement of decision, the court entered judgment in favor of RPN on Dr. Ghaly's FAC. Dr. Ghaly timely appeals.
III. DISCUSSION
A. Dr. Ghaly's Claims on Appeal
Dr. Ghaly claims section 310 did not apply to his appraisal claim (his claim that RPN undervalued his dissenting share (§ 1304)), because: (1) he was not seeking to "void" the merger, or claiming that $18 million was an inadequate price for RPN, and (2) he was not claiming that any of RPN's directors had a material financial interest in NAMM. He also claims (3) the trial court "ignored the intent" of section 310 in applying it to the transaction bonuses; (4) Section 1304 "takes precedence" over section 310; (5) RPN failed to meet its burden of proof under section 310, subdivision (a)(3); (6) RPN waived its right to argue that section 310 applied; and (7) this court should "narrowly construe" Steinberg, and not limit Dr. Ghaly to recovering the fair market value of his share, because he was not claiming that the $18 million purchase price for RPN was too low.
B. Standard of Review
In reviewing a judgment based upon a statement of decision following a bench trial, we resolve any evidentiary conflicts in support of the court's decision, and we accept the court's factual findings if substantial evidence supports them. (See Tribeca Companies, LLC v First American Title Ins. Co. (2015) 239 Cal.App.4th 1088, 1102.) In this context, the "usual definitions" of substantial evidence apply: substantial evidence is evidence of ponderable legal significance, reasonable in nature, credible, and of solid value. (Estate of Young (2008) 160 Cal.App.4th 62, 76.) In contrast, questions of statutory interpretation, and the application of a statutory standard to uncontroverted facts, present questions of law which we review de novo, independently of the trial court. (Cuiellette v. City of Los Angeles (2011) 194 Cal.App.4th 757, 765.)
C. Section 310 Applied to the Transaction Bonuses
Dr. Ghaly claims section 310 did not apply to his appraisal claim because he was not claiming that the merger was void or voidable, nor was he claiming that $18 million was an inadequate purchase price for RPN. He argues, "a claim under [section 310] must be premised on a plaintiff's contention that a transaction is void or voidable." (§ 310, subd. (a).) We agree. But in this case, Dr. Ghaly was claiming that the $12,082,500 in transaction bonuses was void or voidable based on the RPN directors' conflicts of interest and breaches of fiduciary duty in approving them.
In his appraisal claim, Dr. Ghaly was claiming that RPN undervalued his share in approving the merger transaction including the transaction bonuses. Dr. Ghaly claimed his dissenting share was worth $240,000, or an equal 1/75th share of the $18 million purchase price for RPN, not the $70,000 to $74,000 that RPN estimated it was worth, net of the transaction bonuses, as a result of the merger transaction. Dr. Ghaly was in effect claiming that the transaction bonuses were void or voidable based on the RPN directors' status as parties to the transaction bonuses, and breaches of fiduciary in approving them. (§ 310, subd. (a).) The sole basis of Dr. Ghaly's claim that RPN undervalued his share was that the transaction bonuses were void or voidable based on the RPN directors' conflicts of interest in approving them. (§ 1304.)
Thus, the entire theory of Dr. Ghaly's appraisal claim that RPN undervalued his share from $240,000 to approximately $70,000 implicated section 310 as an affirmative defense to the claim. As indicated, section 310 provides for three ways of validating a tainted "transaction between" a corporation and one or more of its directors. (§310, subd. (a)(1)-(3).) Section 310 applied to the transaction bonuses because the transaction bonuses were a "transaction between" RPN and RPN's directors. (§ 310, subd. (a).) Each RPN director received a transaction bonus as a director, and many if not all of the RPN directors also received a transaction bonus as an RPN physician. Although nondirector RPN physicians also received transaction bonuses, the entire $12,082,050 in transaction bonuses was tainted by the interested RPN directors' votes to approve the entire $12,082,050 in transaction bonuses.
Dr. Ghaly claims section 310 did not apply because Dr. Ghaly did not claim that any of RPN's directors had a material financial interest in NAMM. But it was unnecessary for any RPN director to have a material financial interest in NAMM in order for section 310 to apply to the transaction bonuses. Section 310 applies to contracts or other transactions (1) "between a corporation and one or more of its directors," or (2) "between a corporation and any corporation, firm, or association in which one or more of its directors has a material financial interest ...." (§ 310, subd. (a), italics added.) The transaction bonuses were not a transaction between RPN and NAMM. Section 310 applied, however, because the transaction bonuses were a transaction between RPN and its directors. There was no need for RPN's directors to have a material financial interest in NAMM in order for section 310 to apply to the transaction bonuses.
Dr. Ghaly argues RPN's directors did not have a "material financial interest" in NAMM because Dr. Karody testified that none of RPN's directors "owned an interest" in NAMM. RPN argues its directors had a "material financial interest" in NAMM because they had an "expectation of pecuniary gain" from NAMM in connection with the merger. (Harvey v. The Landing Homeowners Assn. (2008) 162 Cal.App.4th 809, 824, fn. 10 [Courts generally find a person has a" 'material financial interest' "-a term not defined in the Corporations Code-when the person has "an expectation of pecuniary gain."].) But there is no evidence that NAMM required RPN to issue the transaction bonuses or that any of RPN's directors had a "material financial interest" in NAMM in connection with the transaction bonuses. In any event, section 310 applies to the transaction bonuses because the transaction bonuses were a "transaction" between RPN and its directors. (§ 310, subd. (a).)
D. The Court Did Not "Ignore the Intent" of Section 310 , and Section 1304 Does Not Govern or "Take Precedence" Over Section 310
Dr. Ghaly claims the trial court "ignored the intent" of section 310 in applying it to the transaction bonuses. Dr. Ghaly argues, "[t]he Legislature clearly did not intend to deprive dissenting shareholders of the right to an appraisal under [section] 1304 by allowing corporations to assert [section] 310 as a defense" to an appraisal claim. In interpreting statutes, we are required to" 'ascertain the intent of the Legislature so as to effectuate the purpose of the law.'" (California Teachers Assn. v. Governing Bd. of Rialto Unified School Dist. (1997) 14 Cal.4th 627, 632.)
But here, the court's application of section 310 to the transaction bonuses did not deprive Dr. Ghaly of his right to a determination of the fair market value of his dissenting RPN share. (§ 1304.) Under section 1304, Dr. Ghaly was entitled to have the court determine the fair market value of his dissenting share. And, given Dr. Ghaly's theory that the transaction bonuses were the reason that RPN diluted the value of his dissenting share, RPN was entitled to a determination of whether the transaction bonuses were "just and reasonable as to" to RPN (§ 310, subd. (a)(3)) and were, therefore, valid as to RPN.
Nothing in sections 310 or 1304 indicates that the Legislature intended to prevent a corporation from raising section 310 as an affirmative defense to a dissenting shareholder's claim that the corporation undervalued the dissenting share as a result of a transaction between the corporation and the directors. Dr. Ghaly suggests that allowing section 310 as an affirmative defense to an appraisal claim will in all instances deprive dissenting shareholders of their right to a judicial determination of the fair market value of their dissenting shares. (§ 1304.) But here, section 310 did not deprive Dr. Ghaly of his right to a determination of the value of his RPN share. It only allowed RPN to prove that Dr. Ghaly was unable to show that RPN undervalued Dr. Ghaly's RPN share, or directly diluted the value of his share, in approving and paying the transaction bonuses.
Dr. Ghaly argues section 1304 "takes precedence" over section 310 because section 1304 is a more specific statute than section 310." '" 'A specific provision relating to a particular subject will govern in respect to that subject, as against a general provision, although the latter, standing alone, would be broad enough to include the subject to which the more particular provision relates.'" '" (Carmack v. Reynolds (2017) 2 Cal.5th 844, 856; Code Civ. Proc., § 1859.) Sections 310 and 1304 concern different subjects. Section 1304 allows a court to determine the value of dissenting shares when the corporation and dissenting shareholders disagree on the value, and section 310 allows a corporation to validate a transaction between the corporation and one or more of its directors if the transaction is "just and reasonable as to" the corporation. (§ 310, subd. (a)(3).) Thus, neither statue governs the other or "takes precedence" over the other. The trial court, in effect, determined that the value that Dr. Ghaly received for his share was just and reasonable.
E. The Transaction Bonuses Were Just and Reasonable to RPN and Its Shareholders
Dr. Ghaly claims RPN failed to meet its burden of proving that the transaction bonuses were valid under section 310, subdivision (a)(3). We disagree. Under section 310, subdivision (a)(3), a transaction between a corporation and one or more of its directors is neither void nor voidable because the director or directors are parties to the transaction if, "the person asserting the validity of the . . . transaction sustains the burden of proving that the . . . transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified." (Ibid.; see Sammis v. Stafford (1996) 48 Cal.App.4th 1935, 1943 [Section 310, subd. (a)(3) "applies 'to contracts or transactions not approved as provided'" in subdivision (a)(1) or (a)(2) of section 310.].)The court found that RPN, "the party asserting the validity" of the transaction bonuses, sustained its burden of proving that the transaction bonuses were "just and reasonable as to" RPN. (§ 310, subd. (a)(3).) The entire record supports this conclusion.
The transaction bonuses were not authorized, ratified, or approved under subdivision (a)(1) or (a)(2) of section 310. All of RPN's directors received a transaction bonus and were therefore "interested" in the transaction bonuses. The record also indicates that all of the directors were shareholders who voted as shareholders to approve the merger transaction including the transaction bonuses. Thus, the transaction bonuses were not ratified by the votes of all of RPN's shareholders without the votes of shareholders who were interested directors (§ 310, subd. (a)(1)), or by the vote of RPN directors without the votes of any interested directors (id. at subd. (a)(2)).
As the trial court explained, the transaction bonuses were just and reasonable to RPN for at least five reasons. First, the goodwill of RPN's physician practices was "essential" to the merger transaction and the principal asset that RPN was selling to NAMM in the merger transaction. RPN had "little else" to deliver to NAMM in return for the $18 million purchase price for RPN. Second, transaction bonuses were consistent with RPN's longstanding custom and practice of paying its annual profits to its physicians as annual bonuses, rather than to its shareholders, pro rata, based on the ownership of RPN shares. Third, the transaction bonuses were consistent with the buy/sell agreements that all RPN shareholders signed with RPN in acquiring their RPN shares. Fourth, RPN's shares had no market value, the shares could not be sold to anyone other than RPN, and RPN's directors could "properly consider" the shares' lack of marketability in assigning a value to the shares while considering the separate value of RPN's goodwill.
As the trial court observed, goodwill is the" 'the advantage or benefit which is acquired by an establishment beyond the mere value of capital stock, funds, or property employed therein, in consequence of the public patronage and encouragement which it received from constant or habitual customers .... [I]t is the probability that the old customers will resort to the old place. It is the probability that the business will continue in the future as in the past, adding to the profits of the concern and contributing to the means of meeting its engagements as they come in.'" (In re Marriage of Watts (1985) 171 Cal.App.3d 366, 370-371, quoting In re Lyons (1938) 27 Cal.App.2d 293, 297-298; see Bus & Prof. Code, § 14100 [ "The goodwill of a business [is] the expectation of continued public patronage."]; Bus & Prof. Code, § 14102 ["The goodwill of a business is property and is transferrable."].)
Fifth, Dr. Karody testified that the merger with NAMM would not have closed unless the merger transaction included the transaction bonuses. The court was "persuaded by Dr. Karody's testimony that the only way to induce RPN physicians to continue with RPN-and thereby deliver the good will of RPN to NAMM and close the transaction-was to award merit-based bonuses consistent with prior periodic bonuses."
Dr. Ghaly claims that even if the transaction bonuses were just and reasonable as to RPN (§ 310, subd. (a)(3)), they were not just and reasonable as to Dr. Ghaly, the sole dissenting shareholder to the merger. Again, we disagree.
A director's fiduciary duty extends to the corporation and all of its shareholders. (Remillard Brick Co. v. Remillard-Dandini Co. (1952) 109 Cal.App.2d 405, 419.) Under the common law, when a transaction is challenged based on a director's conflict of interest," 'the burden is on the director . . . not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.'" (Tenzer v. Superscope (1985) 39 Cal.3d 18, 31-32 (Tenzer), italics added.) By showing the transaction bonuses were "just and reasonable" to RPN (§ 310, subd. (a)(3)), RPN showed that the bonuses were just, reasonable, and inherently fair to all of RPN's shareholders, including Dr. Ghaly (Tenzer, at pp. 31-32; see Coley v. Eskaton (2020) 51 Cal.App.5th 943, 954-956 &fn. 3 [directors had burden of showing disputed transactions were "just and reasonable" to corporation under Corporations Code section 7233 and "just (or fair) and reasonable" to the corporation"' "and those interested therein" '" under the common law standard of Tenzer]).
In this case, there was no substantive difference between the reasonableness of the transaction bonuses to RPN as a whole and the reasonableness of the transaction bonuses to all of RPN's shareholders, including Dr. Ghaly. (See Sammis v. Stafford, supra, 48 Cal.App.4th at pp. 1942-1945 [shareholder/director who showed his salary was just and reasonable to the corporation (§ 310, subd. (a)(3)) defeated derivative action by corporation's only other shareholder who claimed the director's salary was a misappropriation of corporate funds].) By showing that the transaction bonuses were just and reasonable, and therefore valid, as to RPN (§ 310, subd. (a)(3)), RPN showed that the transaction bonuses were just and reasonable, and therefore valid, as to all of RPN's shareholders, including Dr. Ghaly.
Additionally, even if the trial court erred in granting RPN's motion to hold the bifurcated trial on RPN's section 310 defense, or in concluding that the defense barred Dr. Ghaly's appraisal claim, the error did not prejudice Dr. Ghaly. (People v. Watson (1956) 46 Cal.2d 818, 836; Cal. Const., art. I, § 13; Code Civ. Proc., § 475.) A trial error is prejudicial under California law "only when the court, 'after an examination of the entire cause, including the evidence,' is of the 'opinion' that it is reasonably probable that a result more favorable to the appealing party would have been reached in the absence of the error." (Watson, at p. 836.) There is no reasonable probability that Dr. Ghaly would have realized a more favorable result on his appraisal claim-his claim that RPN undervalued his share-if the court had not held a bifurcated trial on the section 310 defense and had allowed Dr. Ghaly to proceed in the first instance on his appraisal claim. In that scenario, Dr. Ghaly would have presented evidence and argued that the $18 million purchase price for RPN should have been distributed pro rata, net of merger expenses, to RPN's 75 shareholders, including Dr. Ghaly. But in defense to this claim, RPN would have shown, just as it did in this trial, that the transaction bonuses were just, fair, and reasonable to RPN and to all of RPN's shareholders, including Dr. Ghaly. Thus, in that hypothetical trial, as in this trial, Dr. Ghaly would have been unable to show that RPN undervalued his share.
Dr. Ghaly further argues that RPN failed to meet its burden of proving that "the merger was just and reasonable" to all of RPN's shareholders, including Dr. Ghaly. But the validity of the merger, and the $18 million purchase price for RPN, was not in dispute. As a dissenting shareholder, Dr. Ghaly could not attack the validity of the merger. (§ 1312, subd. (a); Steinberg, supra, 42 Cal.3d at pp. 1205-1206.) And Dr. Ghaly stipulated that $18 million was a "fair" price for RPN.
F. RPN Did Not Waive Its Right to Rely on Section 310
Dr. Ghaly claims RPN waived its right to claim that section 310 barred or defeated Dr. Ghaly's claim that RPN undervalued Dr. Ghaly's dissenting share. (§ 1304.) Dr. Ghaly points out that," 'California courts will find waiver when a party intentionally relinquishes a right or when that party's acts are so inconstant with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.'" (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 33-34.) Dr. Ghaly argues that RPN acted inconsistently with its claim that section 310 barred Dr. Ghaly's appraisal claim by arguing in its demurrer to the FAC's common law causes of action that an appraisal was Dr. Ghaly's exclusive remedy for his claims that RPN and its directors breached their fiduciary duties to RPN's shareholders in approving the transaction bonuses.
RPN did not waive its section 310 defense. RPN's claim that section 310 barred Dr. Ghaly's appraisal claim was consistent with RPN's earlier claim, in its demurrer to the FAC, that Dr. Ghaly's fiduciary duty and other common claims against RPN and its directors (the board defendants) could only be raised in the context of Dr. Ghaly's action for an appraisal of the value of his dissenting share. (Ghaly I, supra, E075927 ["Dr. Ghaly may vindicate his misconduct claims against defendants for breach of fiduciary duty and constructive fraud, based on defendants' decision to distribute the $12,082,500 in bonuses, through his fifth cause of action for dissenters' rights."].)
As a matter of law, RPN correctly argued that Dr. Ghaly could only raise his breach of fiduciary duty and other common law claims against RPN and its directors in the context of Dr. Ghaly's appraisal claim. (Ghaly I, supra, E075927; Steinberg, supra, 42 Cal.3d at p. 1209.) But in making this argument, RPN did not concede that any of Dr. Ghaly's common law theories had merit. Rather, RPN consistently claimed that RPN and its directors did not breach their fiduciary duties to Dr. Ghaly in approving the transaction bonuses because transaction bonuses were just and reasonable to RPN (§ 310, subd. (a)(3)) and, by extension, they were just, reasonable, and inherently fair to all of RPN's shareholders under the common law standard for ratifying a transaction tainted by a director's conflict of interest (Tenzer, supra, 39 Cal.3d at pp. 31-32).
G. Steinberg Applies Even Though Dr. Ghaly Did Not Dispute RPN's $18 Million Value
Lastly, Dr. Ghaly claims that Steinberg does not apply-that is, Dr. Ghaly's rights as a dissenting shareholder are not limited to recovering the fair market value of his RPN share from RPN (Steinberg, supra, 42 Cal.3d at p. 1209)-because Dr. Ghaly agreed that $18 million was a "fair" price for RPN. Steinberg reasoned that allowing dissenting shareholders to sue the corporation and "individual wrongdoers connected with the merger" for damages in excess of the fair market value of the dissenting shares would "prevent the consummation of reorganizations which would benefit the majority and the corporation as a whole." (Steinberg, supra, 42 Cal.3d at p. 1210.) Dr. Ghaly argues that Steinberg's rationale does not apply here, and this court should "narrowly construe" Steinberg because Dr. Ghaly did not claim that $18 million was an inadequate price for RPN. Rather, Dr. Ghaly only challenged the validity of the $12,082,500 in transaction bonuses that diluted the value of his RPN share.
Dr. Ghaly's position provides no basis for distinguishing Steinberg. We rejected this argument in Ghaly I, where we explained there was "no basis for distinguishing Steinberg and its progeny from this case." (Ghaly I, supra, E075927) Again, there is no basis for holding that Steinberg does not limit Dr. Ghaly's remedy as a dissenting shareholder to recovering the fair market value of his dissenting share. In effect, Dr. Ghaly claimed that the $12,082,500 in transaction bonuses were void or voidable because the RPN directors had conflicts of interest and breached their fiduciary duties in approving the transaction bonuses. Certainly, Dr. Ghaly cannot reasonably dispute this, as it would be necessary to undo the transaction bonuses in order to increase Dr. Ghaly's share. Dr. Ghaly's theory raises the same concerns that Steinberg articulated in holding that section 1312, subdivision (a), limits the rights of dissenting shareholders to a recovery of the fair market value of their dissenting shares. Like dissenting shareholders who claim their dissenting shares were undervalued because the corporation accepted inadequate consideration for the merger, dissenting shareholders who claim the corporation undervalued their shares by unlawfully distributing the merger proceeds can "prevent the consummation of reorganizations which would benefit the majority and the corporation as a whole." (Steinberg, supra, 42 Cal.3d at p. 1210.)
IV. DISPOSITION
The judgment is affirmed. RPN shall recover its costs on appeal.
We concur: SLOUGH Acting P.J. MENETREZ J.