DeMatteo Salvage Company, Inc. is a Long Island based, family-owned business since the 1920s, designing and installing machinery and equipment for scrap paper and solid waste customers.  The company had multiple owners who, in this case, were brothers.   DeMatteo Salvage also had a buy-sell agreement which dated back to 1966.  It was a fixed-price agreement, which read, in part:

The last value established preceding the death of a Stockholder shall be the value of his stock for purposes of this agreement. This provision shall not be altered by the fact that the Corporation and the Stockholders for any reason have failed to redetermine such value at any time or from time to time. All redeterminations of value shall be endorsed upon Schedule A hereof, dated and signed by the Corporation and the Stockholders.

Readers of this blog know that I do not like fixed-price buy-sell agreements.  I have said for years that formulas and fixed prices are not good pricing mechanisms for most buy-sell agreements.  A short quote from Buy-Sell Agreements for Closely Held and Family Business Owners state the conclusion succinctly:

Re Fixed Prices (at p. 80)…In my opinion, for most situations, fixed-price buy-sell agreements should be avoided like a contagious disease.  However, if you have a fixed-price agreement, you must have the discipline to update the price periodically.  And you must amend the agreement to include a workable appraisal process in the (likely) event that you fail to update it.

See also my post, Book Value Pricing [i.e, essentially a fixed price] for Buy-Sell Agreement Upheld in New Jersey.

DeMatteo Salvage Co. and the DeMatteo families who owned it, were mired in litigation regarding their buy-sell agreement for nearly a decade.  It is amazing that someone or anyone was able to mind the family store.  The case recently came to a head (again, I guess) with a decision in New York:  DeMatteo v. DeMatteo Salvage Co., 2011 NY Slip Op 09586 (2d Dept Dec. 27, 2011).  This was a decision of the Supreme Court of the State of New York Appellate Division, Second Department.

I could review the case in depth, but Peter Mahler has already done so on his New York Business Divorce Blog.

Peter titles his review of the case as “An Ill-Fated Solution to an Ill-Fated Buy-Sell Agreement.”

Please do read Peter’s post if you have a fixed-price buy-sell agreement.  Please read this post if you have clients that have a fixed-price buy-sell agreement.  Please share this post with anyone you know who might be shocked into action to fix a potentially disastrous problem before it explodes.

You can get started with Peter’s conclusion regarding the DeMatteo matter:

Between the first buy-out litigation following the eldest brother Joseph’s death, and the second lawsuit started by Gloria after Edward’s death, the DeMatteo family has been warring in the courts over the value of the companies’ shares for more than a decade. Whatever one thinks of the outcome, what’s absolutely clear is that the buy-sell agreement failed miserably, both in its design and its implementation, in its intended purpose to ensure family control of the businesses while providing the shareholders’ heirs with a measure of financial security based on a consensual, non-litigated, fair valuation of the companies’ equity.

• It was a mistake to design the buy-sell agreement without requiring periodic updates.
• It was a mistake to design the buy-sell agreement without providing an alternative valuation method when a buy-out event occurs more than a year or two after the last agreed valuation.
• It was a mistake for the shareholders to come up with their own valuations over the years without seeking the guidance of a professional appraiser.
• It was a mistake for the shareholders to agree to rescind the prior valuations in favor of obtaining a professional appraisal, and then not  following through by having the professional perform the appraisal until long after the death of a shareholder, when the financial interests of the surviving shareholders and the deceased shareholder’s estate became antagonistic.

Business appraiser and author Z. Christopher Mercer, a leading authority on buy-sell agreements, has described fixed pricing in a buy-sell agreement as a “ticking time bomb”. The DeMatteo case is a powerful demonstration of the accuracy of Chris’s warning.

Now that you know the punchline, take a couple of minutes to read the entire Mahler post regarding DeMatteo.