Who Owns the Stock after the Buy-Sell Agreement is Triggered?

StockCertificates

“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.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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2 thoughts on “Who Owns the Stock after the Buy-Sell Agreement is Triggered?

  1. Good catch! I am imagining that many BSA contemplate a relatively short buy-sell period will lapse between the time a selling stockholder tenders her shares and the company (or other stockholders) purchasing them. And if dividends/distributions need to be paid for that short period of time, no problem. But when litigation occurs, and the selling stockholder’s holding period stretches out – well, you get the problem you encountered.

    I know you’re not an atty, but legally, can a BSA specify that – on a trigger date – the selling stockholder’s shares become non-voting and are not entitled to dividends?

  2. Rod,

    You are right in that most buy-sell agreements contemplate a fairly short period before transactions close after a trigger event. However, it almost always takes longer than a short while, particularly if there is a valuation process to determine price.

    It is important to agree on what happens to the vote if shares are subject to the provisions of a buy-sell agreement. It is also important to agree on distributions. For example, if the business is a tax pass-thru entity, the shareholder will accrue income with all other owners and will need to receive distributions for taxes.

    Unfortunately, when trigger events occur, companies often do not want to treat departing owners as continuing owners until transactions are complete. Nevertheless, they are, so it is good to agree on the continuing terms of ownership in buy-sell agreements.

    You are right. I’m not an attorney. But I do believe that owners can agree to eliminate the vote on triggered shares — at least I’ve seen it done on a number of occasions. But eliminating dividends is a different thing entirely!