A long battle among the three brothers who own Stan Koch & Sons Trucking (SKT), a Minnesota-based truckload carrier, looks set to be resolved with a buyout price established to meet the demands of the one member of the trio no longer involved in the company.
James S. Koch hasn’t been involved in SKT or a separate family company, Koch Industries (KI), since 2006. Earlier this month, a judge upheld most of a jury decision that awarded James Koch some of what he was seeking while rejecting some other claims.
(The Koch brothers in question are not related to the more famous politically-involved and sometimes controversial Koch Brothers).
The end result of the decision by District Court Judge Laurie Miller in Hennepin County — which includes Minneapolis — is that James Koch’s shares in SKT and KI will be bought out by his brothers, Randy G. Koch and Dave H. Koch, for $58.5 million.
That is based on what the company was worth in 2017: $168 million. In 2020, according to the valuations considered by the court, it was worth $216 million.
James Koch is also getting a payout of $12 million in damages for “Breach of Contract and Breach of the Duty of Good Faith and Fair Dealing.” That finding by the jury related to the 2012 decision by SKT management — including Randy and Dave Koch — to halt agreed-upon bonus payments because of questions raised during an IRS audit regarding their tax deductibility.
Ownership of SKT was not evenly distributed. James owned 30.3136%. The other brothers each owned 34.8432%. There was no dispute in the court case about the distribution of the equity.
How to set the valuation of the company took up most of the more than 90 pages in Miller’s decision. Ultimately, she set the value based on a 2017 valuation, rather than a valuation set at the end of the 12 months through May 2020. Another year after that presumably would have been more lucrative for James Koch; the decision from Miller said the 12 months that ended May 31, 2022, was the most profitable in the company’s history.
The termination of those bonus payments to James — though they stopped to the other brothers as well — was found by a jury last year to be in breach of the agreement that created them. The jury found that the payments were never created to be contingent on a particular tax status.
Miller’s decision makes clear that these bonus payments were not the same as dividends, which continued. The dispute over their tax status was significant enough that a trial date over the issue with the IRS had been scheduled for March 2019, Miller’s opinion noted, but ultimately was settled by August 2019.
There were no shareholders in the company besides the three brothers. The recap of the brothers’ history shows that tensions between James and the other two went back to the early 2000s.
A hint of how bad the relations were can be seen in Miller’s discussion of the decision by SKT management, after dumping the tax-questionable bonus payments, to change James’ status to a nonemployee, which meant the end of his company health care plan.
In August 2019, according to the court summary, Randy wrote to James to inform him of this change, but said it could be rectified if James moved back to Minnesota from the Las Vegas area, where he had moved many years earlier. The one requirement: He would need to return to work at SKT as an employee, “as long as you will actually work.”
The road to the $58.5 million that James Koch is getting for his shares in SKT and KI is a long one in the court document. Each side hired valuation experts, and the judge’s recap of their various methodologies goes on for dozens of pages in the 92-page decision.
Ultimately, she chose the valuation submitted by James Koch’s valuation expert. But there also was a dispute over what date should be set for the valuation. James won one and lost one: His team’s valuation was chosen, but for May 31, 2017, rather than May 31, 2020. That meant the valuation for Randy and Dave to buy out their brother came to $168 million rather than $216 million. A similar process led to the valuation of KI at $30 million.
The total payout to James Koch then was 30.3136% of the $168 million valuation of SKT, which came to approximately $48.5 million, and one-third of the $30 million set for KI, which comes to $10 million, for a total of about $58.5 million.
James also walks away with the $12 million award for breach of contract and was awarded attorneys’ fees.
It wasn’t a clean sweep; some other allegations in the lawsuit against Randy and Dave Koch regarding other contractual procedures and damages were rejected.
KI, according to the court document, is a distributor of “chain, cable, rope and related products to retailers in the United States.” That company traces its history to 1977, “and its business has remained fairly steady over the years,” the court document says. James Koch primarily worked for KI.
As the brothers’ relationship headed south, James Koch sought to buy out Randy and Dave’s holdings in KI as part of a deal that also would see them purchase James’ shares in SKT. That did not occur, according to the court document.
James left SKT in 2006. The brothers had reached a deal in which they would sell the company as long as the value was $125 million, but that deal also included the bonus payments that became problematic during its IRS audit.
The $125 million price was not reached in a timely manner, though the valuation has soared past that now, and neither SKT nor KI was ever sold.
Attorneys for both James Koch and SKT declined comment.