Another case of seller’s remorse. Two parties agree in writing to the buyback of one party’s shares based on the price a valuator of their choosing determined. The contract prohibits judicial review, but inevitably one party disagrees with the valuation and sues. In a recent case, the flashpoint was the valuator’s application of a minority discount.
'Final and binding’: The plaintiff held a 30% interest in a Volkswagen dealership. After he asked for a corporate dissolution, the company obtained permission to buy back his shares. The court specifically urged the parties to take charge of the valuation process by jointly hiring an appraiser in order to avoid “the needless expense of a ‘battle of appraisers.’"
The parties agreed to retain a sole appraiser—whom they both knew from past appraisals he had done of the company. In a court hearing that preceded the formal engagement of the appraiser, the parties raised the issue of whether to apply a minority discount. The court declined to take a position on this issue. But it said the minority discount question should be “part of the discussion” the parties needed to have on the appropriate valuation method. The two sides eventually stipulated in court that the appraiser’s value determination “shall be final and binding, with no right of appeal for any party.”
The valuator determined the FMV of the plaintiff’s “un-discounted" interest in the company was worth about $385,600. After the application of a 25% minority discount, the plaintiff’s interest was worth almost $100,000 less—$289,200. In response, the plaintiff asked the court to decide whether it was appropriate to use a minority discount. Notwithstanding the contract’s "final and binding” language, the parties “did not agree that [the appraiser] would determine whether or not any discount should be applied to the Plaintiff’s shares,” the plaintiff claimed.
The court declined to get involved. “A stipulation is final, conclusive and binding as to those matters the parties fairly intended to include within its terms,” it said. Also, the appraiser was a known quantity to both parties in light of his prior valuation of the company. And the language of the stipulation was unequivocal. It said "with no right of appeal for any party.” Unless there is an indication of malfeasance, of which there was none here, “contracts voluntarily and fairly made should be held valid and enforced in the courts,” the court said and approved the appraiser’s calculation.
Takeaway: Forget about taking back a commitment to a valuation agreement. When the parties voluntarily enter a valuation contract and expressly relinquish the right to challenge an appraiser’s value determination, courts are unlikely to unmake the agreement—no matter how painful it turns out to be for one party.
Find a digest of Curran v. Curran, 2016 Conn. Super. LEXIS 77 (Jan. 12, 2016), in the May issue of Business Valuation Update. The court’s opinion will be available soon at BVLaw.
Similar case: A recent case in front of the Delaware Court of Chancery follows the same playbook. There, too, the court was unwilling to interfere with the parties’ unambiguous valuation agreement. That case, also available at BVLaw, is PECO Logistics, LLC v. Walnut Inv. Partners, L.P., 2015 Del. Ch. LEXIS 311 (Dec. 30, 2015).