Low buyback value stings departing owners

BVWireIssue #251-2
August 9, 2023

shareholder dissent/oppression
breach of fiduciary duty, liquidation, minority shareholder, shareholder agreement, accounting, employment agreement, dissolution, fiduciary duty, shareholders

Shareholder-employees should take a lesson from a recent case and take a fresh look at their buyout agreements—especially the part about the redemption value. In the case, which was in New York, a law firm shut down after merging into another law firm. Several partners terminated instead of joining the new firm and were asked to surrender their shares in the old firm in return for a check in the amount of $100 for each partner, which was the book value of their shares.

No case: The partners sued, alleging breaches of their employment agreement and fiduciary duty. The court dismissed their claims. The employment agreements allowed for termination (by either party), so they were at-will employees, meaning there was no breach. The shareholder agreement included a mandatory redemption provision with a buyback price set at $100 per share. This was done to avoid future arguments over fair value, and the departing shareholders were bound by that agreement.

The case is Laurilliard v. McNamee Lochner, P.C., 2023 N.Y. Misc. LEXIS 3296; 2023 NY Slip Op 50671(U), and a case analysis and full court opinion are on the BVLaw platform.

A tip of the hat to our friends at the law firm of Farrell Fritz in New York for alerting us to another very interesting court case dealing with minority shareholders. They have a great blog, New York Business Divorce, that covers dissolution and other disputes among co-owners of closely held companies.

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