Indiana Supreme Court Issues Key Ruling on Discounts in Compelled Buybacks


Last year, in a compelled buyout, the Court of Appeals sided with the departing minority shareholder when it found discounts did not apply in a closed-market sale. In a freshly minted decision, the Indiana Supreme Court reversed the Court of Appeals, finding there was no blanket rule disallowing discounts in a compelled buyback. This is especially true where the parties exercised a shareholder agreement whose terms suggested the use of fair market value.

Compelled buyback: The plaintiff was one of the founders of the company and held a minority interest in it. In 2018, he was terminated without cause. Earlier, all shareholders made an agreement that specified how the buyback price of a terminated shareholder’s interest would be determined. The company would buy the interest at “appraised market value,” as determined by an independent valuator and in accordance with generally accepted accounting principles. The independent valuator applied discounts for lack of control and marketability.

The plaintiff asked the trial court for a declaration that discounts are inapplicable because the shareholder agreement here did not “contemplate a fair market value standard.” Ruling on the parties’ motions for summary judgment, the trial court essentially found that the term “market value” as used in the agreement was synonymous with fair market value. According to the trial court, the word “appraised” was an adjective modifying “market value.”

The Court of Appeals reversed, finding, under controlling case law, discounts were inappropriate because the transaction involved a compulsory sale. The company petitioned for transfer to the state Supreme Court.

Parties’ freedom to contract: The opening paragraphs in the Supreme Court opinion make the court’s preference for the company’s arguments clear. The court said, notwithstanding policy concerns that may preclude the use of discounts in certain circumstances, “we hold that the parties’ freedom to contract may permit these discounts, even for shares in a closed-market transaction.” The court went on to say that, “under the plain language of this shareholder agreement—which calls for the ‘appraised market value’ of the shares—the discounts apply.”

The court said prior case law dealing with a statutory buyout “doesn’t control” in a situation such as here, “where the valuation term comes not from a statute but from a contract that contemplates the shares’ ‘appraised market value,’ not their ‘fair value.’”

The agreement’s plain and unambiguous language shows the parties to it agreed to value their shares as if they were sold on the open market, the Supreme Court said.

Further, even if “the valuation term were somehow ambiguous,” the court would still find that “fair market value” was the appropriate standard.

If you’re interested in reading more, a digest of Hartman v. BigInch Fabricators & Construction Holding Co., Inc., Indiana Supreme Court, case no. 20S-PL-618 (Jan. 28, 2021) (Hartman II), and the court’s opinion are available at BVLaw, BVR’s fully searchable repository for all valuation cases and case digests. A digest of the Court of Appeals opinion in Hartman v. BigInch Fabricators & Construction Holding Co., Inc., 2020 Ind. App. LEXIS 183 (May 5, 2020), and the court’s opinion also are available to BVLaw subscribers.


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