As if we need another case illustrating why fixed price buy-sell agreements should be avoided like the plague.
Before we get to the case: A fixed price buy-sell agreement is one in which co-owners of a business select a specific dollar amount, expressed either as enterprise or per-share value, for calculation of the future buyout price to be paid an exiting owner or his or her estate upon the happening of specified trigger events such as death, disability, retirement, or termination of employment. Such agreements can take the form of a stand-alone buy-sell agreement or may be included in a more comprehensive shareholders, operating, or partnership agreement.
Fixed price buy-sell agreements in theory offer two main advantages over pricing mechanisms that utilize formulas or appraisals at the time of the trigger event. One is certainty; everyone knows in advance the amount to be paid upon a trigger event. The other is avoidance of transactional costs; there’s no need to hire accounting or valuation professionals at the time of the trigger event and no need to hire lawyers to litigate differences that can arise with indeterminate pricing mechanisms such as those requiring business appraisals.
But when theory meets reality, reality usually triumphs. Company values can and often do change dramatically over time, for better or worse. And even though the typical fixed price buy-sell calls for periodic updates of the so-called certificate of value, it’s rarely done for any number of reasons ranging from benign neglect to inability to reach agreement on a new value among co-owners of different ages whose interests and exit horizons diverge over time. So when a buyout occurs long after a last agreed value has become out of sync with the company’s significantly higher value as of the trigger date, there’s a powerful financial and emotional incentive for the exiting owner or his or her estate representative to challenge the buyout in court, thereby defeating one of the main reasons to have a fixed price agreement in the first place.
I’ve previously featured on this blog several illustrative fixed price buy-sell lawsuits precipitated by stale or absent certificates of value, including Sullivan v Troser Management, Nimkoff v Central Park Plaza Associates, and DeMatteo v DeMatteo Salvage Co. The latest addition to this ill-fated family of cases is entitled Namerow v PediatriCare Associates, LLC, decided last November by a New Jersey Superior Court judge, in which the court enforced a fixed price buy-sell agreement among members of a medical practice where the original certificate of value hadn’t been updated for 16 years at the time of the plaintiff doctor’s retirement from the practice. Continue Reading Another Reason Not to Use Fixed Price Buy-Sell Agreements