“Who owns the stock after a trigger event?” is an important question.
I was retained as an appraiser in a dispute where a company had terminated a key employee. A buy-sell agreement and a valuation dispute were already underway. Two appraisals had already been performed. The former employee’s appraiser reached a conclusion at a controlling interest level. The employer’s appraiser rendered a conclusion at the nonmarketable minority level. The conclusions were miles apart.
I was retained by the former employee to review both appraisals and to testify at a binding arbitration on the issue of valuation. After reviewing the two appraisals, I concluded that the employee’s expert appraisal 1) was rendered at the appropriate level of value, i.e., control, and, 2) was reasonable in its conclusion.
By the time of the arbitration, the employee had been terminated for nearly two years. While reviewing the buy-sell agreement, I reached the conclusion that the agreement provided that she still owned stock. The agreement was specific in converting the shares of a departed employee to nonvoting shares and in limiting access to certain corporate information.
The agreement was silent regarding distributions, but the corporate charter provided that all shares, voting or nonvoting, were to receive distributions pro rata to ownership. Distributions amounted to 100% of earnings over normal salaries for owner-employees. My conclusion was, of course, reached from my perspective as an appraiser and businessman.
The arbitration panel agreed with my analysis. The former employee was awarded about two years of prior distributions as part of the arbitration settlement. Neither the former employee, her attorneys, the employer, nor its attorneys had identified the dividend issue. Needless to say, the remaining owners were dismayed and my client, the former employee, was overjoyed.
Many buy-sell agreements do not treat the continuing rights of ownership (or not) following trigger events in specific terms.
My challenge to you is to ensure that the owners agree on this important issue. It won’t go away because it’s ignored. The ox that gets gored could be yours (or your client’s), a family member, or a fellow owner.