Dimaria v. Goor, 2012 U.S. Dist. LEXIS 21457 (Feb. 21, 2012)
Twenty years ago, the co-owners of a commercial transport business entered into a stock agreement to ensure the continuity of the closely held company. If one of them died, the agreement gave the company the right to buy all of the decedent’s stock. If the company declined its option, then the surviving shareholder was obligated to purchase the decedent’s stock, which his estate was equally obligated to sell.
Determination of the death price
The agreement provided that the surviving shareholder would pay a price equal to the "total value" of the company divided by the amount of shares. This value would be determined in one of two ways: If the two shareholders had executed a "certificate of agreed value" within two years of the date of death, then that value would control the purchase price. If not, then the defined "value" would equal the amount stated on the most recent certificate of agreed value, which stated "plus (or minus) an amount which reflects the increase (or decrease) in the net worth of the corporation from the date of the most recent certificate of agreed value to the end of the month immediately preceding the decedent’s death, as determined by the certified public accountant (CPA) regularly employed by the corporation, applying generally accepted accounting principles."
At the time (1992) the co-owners executed the stock agreement, they also executed a certificate of agreed value for the company of $2 million.
In 2006, one of the shareholders died. After inheriting his 50% interest, his wife demanded $1 million for her shares. The surviving shareholder refused, asserting that by then, the business was merely a "payroll company" and was worthless. The wife sued the surviving shareholder for a variety of claims. The court eventually found that the company was obligated to repurchase the decedent shareholder’s interest. The defendant moved for summary judgment, accepting his repurchase obligation but claiming the company was worth nothing.
In support, the defendant provided testimony from the company’s CPA, who said that the "actual equity" of the company as of the valuation date (the shareholder’s death) was $5,800—in effect, a zero value. At the same time, the CPA did not attempt to determine the net worth of the company as of 1992 (the date of the last certificate of agreed value) or calculate the amount by which this net value might have increased (or decreased) between 1992 and 2006.
The plaintiff cited several objections. First, she said the shareholders’ agreement empowered the CPA to determine the change in the company’s net, but that the ultimate determination of its value must be made in accordance with the formula set forth in the repurchase provisions. Her CPA expert criticized the defendant’s accountant for failing to properly apply accounting principles generally accepted in the United States of America (US GAAP), which does not equate "value" with "net worth" or mandate the application of book value. Instead, GAAP defines "value" as the amount of money something is worth, he said.
Complex contract is controlling
After considering both sides, the federal district court (E.D. N.Y.) held that the "plain language" and intent of the shareholders’ agreement foreclosed the defendant’s argument.
The defendant’s reasoning also inverted the "complex" formula contained in the buyout clause, the court said. The contract clearly envisioned the "value" to be the dependent variable, calculated by inputting the most recent agreed-upon value ($2 million, in this case) and the change in net worth since that time.
Although the court conceded that it could not, from the face of the agreement, determine which particular valuation method the parties intended to use, "I can determine that the parties did not intend to use the ‘book value’ methodology." Instead, the court found that, under the contract, the company’s CPA must calculate the change in its net worth between 1992 and the valuation date: "He may not simply assume that the net worth was $2 million."
Indeed, there was evidence that the company’s book value was not equal to $2 million in 1992, but that the agreed-upon certificate simply reflected the value of the life insurance policies that the shareholders had purchased to fund any future forced repurchase obligation. Because the company’s net worth may have been substantially less than $2 million in 1992, the court said, subtracting the change in net worth between 1992 and 2006 from $2 million could produce a positive value, "even if its 2006 net worth was a deficit." For these reasons, it denied the defendants’ motion and ordered the parties to conduct a valuation of the company that complied with the court’s interpretation of the buyout clause.
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