Buy – Sell Agreements: Be Sure to Say What You Mean; Keep Good Records
Posted by dempseylawfirm on July 26, 2010
Recently, the Wisconsin Supreme Court issued an opinion in Ehlinger v. Hauser, 2010 WI 54 (June 25, 2010). This case provides us with important reminders of (1) why it is essential in a contract to say what you mean and mean what you say and (2) why it is necessary to ensure that you have adequate financial records to support your company’s financial statements.
One shareholder did become disabled, and the non-disabled shareholder presented an offer to buy the disabled shareholder’s shares. What was the dispute about? You guessed it – each shareholder calculated “book value” in a different way. Each shareholder wished to include different assets and liabilities in the calculation and calculated the value of the assets and liabilities in a different way.
By simply stating that “book value” was to be used, the parties left open the interpretation of that term. It could mean anything from simple adoption of the company’s internally generated balance sheet, i.e., book value being the assets less the liabilities as stated, or a balance sheet generated after a full-blown audit by an outside CPA firm.
Before the trial court, a special magistrate with a CPA background was appointed in an attempt to determine if GAAP (Generally Accepted Accounting Principles) was correctly applied and if the company’s books and records were sufficient to allow a determination of book value. The special magistrate found that, due to poor record-keeping, 76% of the company’s assets and 90% of the company’s liabilities could not be verified through available supporting documentation.
Additionally, the Supreme Court reviewed the issue of the non-disabled shareholder using the company’s money to defend himself in the seven year old lawsuit. The non-disabled shareholder, who was running the business day-to-day, asserted that he had a right to be indemnified by the company for the legal expenses he incurred. The disabled shareholder objected.
The Supreme Court determined that the dispute was primarily between the two shareholders. It would have been proper for the company to indemnify the non-disabled shareholder for actions he took solely in his capacity as a corporate officer or if the company spent funds in its own legal defense. Neither circumstance was present here. Moreover, if the non-disabled shareholder did contend that he was acting as a corporate officer and wished to use the indemnity for corporate officers provided by the Wisconsin Business Corporation Law, he needed to follow the notice procedure outlined in the statutes. He failed to do so here.
As a shareholder, be aware of when you act on your own behalf, and when you act on behalf of the company.
Based on the results of this case, even recently drafted Buy – Sell Agreements should be reviewed to determine if they adequately and precisely identify the means, method or formula for the buyout. Additionally, periodic review of your company’s financial statements is in order to ensure that the necessary supporting documentation and detail is available and can be used in the event a Buy – Sell Agreement is triggered.
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