Sullivan v Troser Management, Inc., 2013 N.Y. App. Div. LEXIS 1641 (March 15, 2013)
The lack of an effective valuation amount—or method--in a shareholder buy-sell agreement has subjected the parties in this case to ten years, and four rounds, of litigation. And the end is not yet in sight.
The plaintiff served as the defendant’s director of sales for the operation of a ski resort. In 1986 the parties made an agreement that promised him an 18% equity interest in the defendant’s closely held corporation if he remained employed until year-end 1991. Under a contemporaneous buy-sell agreement, the defendant had the option to buy back the plaintiff’s stock if, among other things, the employment ended.
The purchase price was to be “an amount agreed upon annually by the Stockholders as set forth on the attached Schedule A.” If the parties failed to establish an annual value, “the value shall be the last agreed upon value except that if no such agreed upon value is established for a period of two years, the value shall be the last agreed upon value increased or decreased by reference . . . the company’s book value.” The agreement listed the plaintiff as a “stockholder.” No Schedule A exists.
In 2003 the plaintiff sued in state court (Supreme Court, Monroe County, which is a trial court) for specific performance of the stock issuance. Moreover, he requested an order that, once the stock was issued, the defendant had an obligation to repurchase it and a determination of the parties’ rights and duties under the buy-sell agreement. The trial court directed the defendant to issue 18% of its shares of stock to the plaintiff, which the defendant subsequently did. The court also ordered the parties to execute the buy-sell agreement and fixed a price for the purchase that aligned with a prior buy-out involving a different shareholder. Both sides appealed.
Volley of appeals. In 2005, the owners sought dismissal of the complaint arguing it was time-barred. The appellate court declined. At the same time, it granted the plaintiff’s request to overturn the lower court’s attempt to set a price for the 18%.
In 2006, the trial court directed the defendant to repurchase the stock for approximately $110,000, based on the defendant’s claim that the method to value the stock was by prorating the value of its parent corporation among that company’s three subsidiaries. The plaintiff appealed, contending that the agreement required that the two stockholders of the defendant determine the value of the stock, not the owners of the parent corporation. He also provided a letter he had received from the defendant’s attorney in 1999 that specified a different valuation method. The appellate court ruled for the plaintiff.
In 2009, the trial court denied the plaintiff’s request for a determination that his shares “be valued on the basis of his percentage interest in the Defendant’s assets” in the event that the defendant exercised its option to buy back the shares. He advocated for the use of a net asset approach that the state’s highest court had approved in a case about the buy-out of a law firm partner pursuant to an agreement that provided for a future agreement among partners that never came into existence.
The plaintiff appealed contending the agreement’s purchase price provision was unenforceable. The defendant presented other stock valuations. The appellate court said the plaintiff showed “as a matter of law that the stockholders have never agreed upon a value of the stock.” Accordingly, there was no way to ascertain his share price in accordance with the terms of the buy-sell agreement. Evidence of stock valuations from other transactions was of no consequence because the plaintiff was not a party to them.
‘No uniform rule for valuing stock.’ In 2011, the trial court denied the defendant’s motion to set the stock purchase price at approximately $184,000 based on its expert’s calculation. The expert had used the same formula the plaintiff proposed in 2009.
The appellate court affirmed the denial. Its 2010 ruling notwithstanding, it stated it did not then require a net asset valuation, a method the High Court approved, but did not mandate. The court clarified that its earlier decision established that the plaintiff’s shares had to be valued “on the basis of his percentage interest.” However, issues of fact as to what the appropriate method for valuing the defendants’ assets remained.
The court rejected the defendant’s claim that the buy-sell agreement’s reference to book value dictated its use to determine the price for the plaintiff’s shares since the parties never agreed on the value of the shares. The court specifically noted that even though under provisions of the business corporation law, the plaintiff had no right to the “fair value” of the stock, “it does not follow . . . that the plaintiff is entitled only to book value.”
There was “no uniform rule for valuing stock in closely held corporations,” the appellate court stated. A court must tailor the valuation method to a particular case, based on the evidence at trial.
But—continuing the battle, the appellate court concluded that the owners had never exercised their option to buy back the shares. So, after all the legal costs, it determined that the resolution to the valuation method and amount must wait until the defendant actually refused to buy the shares at the price the lower court set after a trial on the value of the shares.