For owners of closely-held businesses, there are few provisions meriting more attention in an owners’ agreement than the buy-sell agreement.  Buy-sell agreements come in many different forms, and the best ones are designed to address specific concerns of the owners or business.  For example, shotgun buy-sell agreements (like the kind discussed here and here) protect against deadlock of equal managers; death/disability buy-sell agreements (here and here) provide the deceased owner’s heirs with a path to liquidate the estate’s interest; and right-of-first refusal agreements (here) protect against outside ownership of the entity.

This week’s post concerns a corporation’s efforts to enforce the buy-sell provisions of its shareholders agreement with two common (and oft-litigated) provisions: a dissolution-based trigger and a fixed value.  I am especially delighted to blog about Estate of Connie Collins v. Tabs Motors of Valley Stream Corp., No. 160529/2019 (NY County 2021), not only because it sheds light on two hot topics in buy-sell agreements, but also because Peter Mahler and I represent the prevailing parties in the case.

The Company and the Buy-Sell Provision

Tabs Motors of Valley Stream Corp owns real estate located in Nassau County.  Prior to the events leading up to the litigation, the 200 outstanding shares of Tabs were owned 50 each by four siblings: Michael, Connie, Rose, and Steven (Steven owned his shares through his wholly-owned company, Bellerose Automatic Transmissions).  Ownership of Tabs is governed by a 2012 Shareholders Agreement that contains two notable provisions.

First, Section 3.8(A)(vii) of the Shareholders Agreement contains a buy-sell provision protecting the corporation from attempts by the shareholders to dissolve the corporation involuntarily:

If any shareholder files a petition to dissolve the Corporation; . . . the Corporation firstly, and then the other Shareholders shall have the option to purchase all, but not part of the shares owned by such Shareholder.

In the event of a petition for dissolution, Tabs could exercise its option by majority-vote of the remaining shareholders at a duly-noticed shareholders meeting.  Pursuant to Section 3.2 of the Shareholders Agreement, the petitioning Shareholders “shall abstain from voting as a Shareholder or Director with respect to the approval or rejection by the Corporation.”

New York courts have long-enforced buy-sell agreements triggered by dissolution—especially those that, like Tabs’ here, expressly list dissolution as a trigger (as opposed to triggers employing more general language, such as the “disposition of shares in any manner whatsoever”).  And these provisions often make good business sense: they ensure that a corporation has a mechanism to prevent a shareholder from using the specter of a deadlock or oppression-based dissolution proceeding to compel a high buyout price (see In re Doniger, 122 AD2d 873 [2d Dept 1986]; Matter of Johnsen, 31 AD3d 172 [1st Dept 2006]).

Second, Section 5.1 of the Tabs Shareholders Agreement provides that if the corporation elects to exercise its purchase option, the price is fixed by Schedule B to the Shareholders Agreement, which the shareholders executed contemporaneously with the Shareholders Agreement:

If at any time it becomes necessary to determine the Stock Value of the stock of the Corporation, the Stock Value set forth in the last certificate of Stock Value shall be conclusive as to Stock Value and shall be accepted as the Stock Value as of the date on which Stock Value is to be determined.

Schedule B fixes Tabs’ stock value per share at $5,250.

Notably, when Tabs’ shareholders prepared Schedule B in 2012, they gave the stipulated value some staying power by making it nearly double the value determined by a comprehensive appraisal of Tabs that was performed in 2011, only two years before the execution of the Shareholders Agreement.

Connie’s Estate and Michael Petition for Dissolution, Triggering the Buy-Sell Provision

Through 2018, Tabs operated without much involvement or disagreement from the shareholders.  Steven, Tabs’ President, managed Tabs’ affairs without taking any salary and without any input or interest expressed by any other shareholder.  The company made regular distributions to the shareholders.

When Connie passed away, the relationship among the owners fractured.  In October 2018, the executors of Connie’s estate and sibling Michael sued Steven and Tabs in Nassau County Supreme Court, accusing Steven of improprieties in connection with a 2011 reorganization of the family’s holdings.

A year later (and after the Nassau County court dismissed all claims except a demand for access to books and records), the Estate of Connie Collins and Michael (collectively, the “Petitioners”) filed a special proceeding in New York County Supreme Court demanding dissolution of Tabs on the grounds that, pursuant to BCL § 1104, Tabs’ shareholders were hopelessly deadlocked in the management of Tabs.  The Petitioners also brought derivative claims against Steven for alleged mismanagement and corporate waste at Tabs, all stemming from allegedly withheld distributions.

Tabs Motors Exercises its Buyout Option, Seeks Specific Performance

In accordance with the terms of the Shareholders Agreement, the remaining shareholders—Steven (through Bellerose) and Rose—held a shareholders meeting where they both voted in favor of Tabs’ exercising its right to purchase the shares held by the Petitioners at the fixed value in Schedule B, $5,250 per share.  Neither the executors of Connie’s estate nor Michael—neither of whom were permitted to vote on the option pursuant to the Shareholders Agreement—attended the meeting.

Before the closing of the contemplated sale of their shares, the Petitioners sought a temporary restraining order enjoining the sale and appointing a receiver over the Corporation, which was denied.  Petitioners refused to tender their shares on the closing date, prompting Tabs to file counterclaims for specific performance.

Shortly after Petitioners refused to close on the sale of their interests, Tabs moved for summary judgment specifically enforcing the dissolution-triggered buy-sell agreement at the stipulated price.

In opposition, Petitioners argued that (i) the buy-sell agreement was unconscionable both because Steven was an attorney and because the value in Schedule B is lower than Petitioner’s own assessment of the value of Tabs’ property; (ii) their claims against Steven for breach of fiduciary duty were sufficient to nullify the buy-sell agreement; and (iii) the meeting at which Tabs voted to exercise its option was void because a quorum of shareholders was not present.

The Court’s Ruling

Last month, New York County Commercial Division Justice Reed issued a memorandum and order granting Tabs’ motion for summary judgment and dismissing the Petitioners’ request for dissolution under BCL 1104.  Citing Doniger and Johnsen, the Court held that:

Tabs has demonstrated by admissible, documentary evidence that there is no genuine issue in dispute requiring a trial and that it is entitled to dismissal of the petition and an award of specific performance of the Shareholder Agreement.

The Court rejected Petitioners’ contention that the Shareholders Agreement was unconscionable; it applied equally to any shareholder who petitioned for dissolution, and all parties had more than a year to review the agreement and receive counsel on it before it was signed.  As to the allegedly stale Schedule B, the Court noted that Schedule B doubled the value of the 2011 Tabs appraisal, and in 2018 in connection with the probate of Connie’s estate, the executors affirmed that the value of Connie’s shares in Tabs was the same as set forth in Schedule B.  The agreement, said the Court, was “fundamentally fair.”

The Court also rejected Petitioners’ argument that their breach of fiduciary duty claims created issues of fact sufficient to avoid summary judgment on the buy-sell agreement.  Those claims were disposed of in Petitioners’ Nassau County action.  “Furthermore, even if the [breach of fiduciary duty] claims were true,” held the Court, “they would not invalidate the buy-sell provision.  The buy-sell provision is still enforceable.”

As to the quorum requirement, the Court held that because neither the executors of Connie’s estate nor Michael were permitted to vote on the question of whether Tabs would purchase their shares, their presence did not count toward the quorum requirement.  Thus, because—Rose and Bellerose Automatic Transmissions, who collectively hold 100% of the shares entitled to vote on the repurchase—were present at the shareholders meeting, the quorum requirement was satisfied.

Closing Considerations

In the areas of dissolution-triggered buy-sell rights and fixed value buy-sell agreements, Tabs adds to the list of cases reinforcing the fundamental reality that, absent truly exceptional circumstances, Courts are likely to enforce the terms of an owners’ agreement as written.  In Tabs, neither a years-old certificate of value, nor claims of unconscionability, nor allegations of breach of fiduciary duty were sufficient to overcome the unambiguous terms of the buy-sell agreement.

In my view, Tabs is most notable for its recognition that Petitioners’ breach of fiduciary duty claims did not affect the enforceability of the buy-sell agreement or the share price fixed by the certificate of value.  Thus, unlike appraisal-based buy-outs (such as those under BCL 1118), a fixed-value buyout triggered by a dissolution proceeding provides no room for adjustment of the buyout price based on breach of fiduciary duty claims.  Counsel drafting a buy-sell agreement or litigating potential claims in the face of a dissolution-triggered buy-sell agreement would be wise to take note.

Finally, it is worth noting that some commentators are skeptical of buy-sell agreements containing fixed values.  They observe that despite the disarming simplicity of an ex ante agreement on buyout value, owners may fail to update the buyout value, even after dramatic changes in the value of the company.  While the Tabs’ shareholders foresaw this problem by fixing the value at double a recent appraisal, in other cases, a stale certificate of value can lead to litigation over its enforceability.