In a case of first impression, the Texas Court of Appeals considered a buy-sell agreement that purported to bind shareholders and their spouses in the event of divorce. As a further complication, the husband had signed an employment agreement with the private medical association—but neither he nor his wife had signed the shareholders’ agreement. This unsigned agreement limited the value of a divorcing shareholder’s interest to the equity buy-in price (in this instance, a mere $11,000 for a 25% share in a business with an estimated $3 million to $5 million book value).
In a pre-trial hearing, the trial court precluded the wife’s expert’s testimony about the husband’s share in the P.A. ($794,300 book value to $1.1 million fair market value) and ruled the buy-sell agreement was binding. The wife appealed, citing Texas cases in which partnership buy-sells were just one of many valuation factors to consider. But these cases concerned partnerships, the Court of Appeals held, and they did not address the specific event of a partner’s divorce. In this case, the medical association was akin to a private, closely held corporation, and even though the wife didn’t sign the shareholders’ agreement, it offered evidence of market value—as did the prior buy-outs of three former members, all at the $11,000 contractual price. The marital community owned an interest in the shares of the association, the court held, as part of its reasoning, “and not an interest in the association as an ‘ongoing business’.”
Read the full case digest of Mendell v. Mendell (Tex. App., March 18, 2010), in the May 2010 Business Valuation Update™, when we’ll also post the court’s full opinion at BVLaw™. Have an opinion about the effect of buy-sell agreements in divorce? Contact the BVWire editor.