So You're a Shareholder—So What?

Laurilliard v. McNamee Lochner, P.C.; 2023 N.Y. Misc. LEXIS 3296; 2023 NY Slip Op 50671(U)

Thanks once again to our friends at Farrell Fritz in New York for alerting us to another very interesting New York court case dealing with minority shareholders. In an article titled "At-Will Employment Agreement Plus Mandatory Redemption Clause Leaves Minority Shareholder-Employees Out in the Cold," written by Peter Sluka¹ of Farrell Fritz, Sluka provides a well-written analysis of the recent New York decision in the Laurilliard² case. I refer you to that article for not only a more in-depth analysis of the case, but also a history lesson on precursor cases that set the stage for the Laurilliard decision.

In a combination of an at-will employment agreement and a contractual mandatory redemption clause of a shareholder, the at-will employment status in effect trumps the fiduciary responsibility to a minority shareholder. The bottom line was that the controlling shareholders were able to cut the two minority shareholder defendants out of a share of a $600,000 liquidation distribution of cash.

The bottom line for the value of a minority interest in the business is that, in this case at least, the under market value of the redemption agreement ($100 for the one share each minority shareholder defendant held) holds because their termination as at-will employees triggered the redemption agreement. As business valuation professionals, especially those who are CPAs, we are often involved in the structure of similar under-market types of shareholder agreements. They are perhaps more common among professional firms such as doctors, accountants, and lawyers, but I have consulted on a number of employee stock option plans for nonprofessional businesses. Many have formula redemptions, such as book value or a fixed value. These plans are contractual plans, and courts are, fortunately, usually unwilling to usurp the right of independent parties to execute contracts with arm's-length provisions in them.

One of the interesting points that the Laurilliard case raised is that a redemption agreement for a minority shareholder, who is such a shareholder by virtue of an employee stock ownership plan, should be carefully worded to insure that the employer does not inadvertently fall into a trap that might negate the contractual terms of a redemption agreement. This is especially true if your state is not an at-will state.

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¹ Peter J. Sluka, “At-Will Employment Agreement Plus Mandatory Redemption Clause Leaves Minority Shareholder-Employees Out in the Cold,” New York Business Divorce, July 24, 2023; nybusinessdivorce.com/2023/07/articles/buyout/at-will-employment-agreement-plus-mandatory-redemption-clause-leaves-minority-shareholder-employees-out-in-the-cold.
² Laurilliard v. McNamee Lochner, P.C.; 2023 N.Y. Misc. LEXIS 3296; 2023 NY Slip Op 50671(U).