Buy-Sell Triggers and Valuation – Estate of Collins v. Tabs Motors
Buy-sell provisions are a significant portion of owner agreements for any closely held business. In the past, we have discussed the Shotgun Buy-Sell Agreement, the “I cut, you choose” method of deadlocked dispute resolution. Today, we tackle different triggering and valuation mechanisms showcased in a case out of New York, Estate of Connie Collins v. Tabs Motors of Valley Stream Corp.
Estate of Connie Collins v. Tabs Motors of Valley Stream Corp. – The Facts
Tabs Motors (“Tabs”) is a family-owned automotive repair business. Four siblings: Michael, Connie, Rose, and Steven, each owned 25% of Tabs’ 200 outstanding shares. Michael, Connie, Rose, and Steven each agreed to certain restrictions on the transferability of their shares in a 2012 Shareholders Agreement, which included a fixed price valuation. One trigger for a buyout provided the company first, and the shareholders second, with an option to purchase shares if a shareholder sought to dissolve the company involuntarily.
By the time Connie died, the fair market value of the shares increased beyond the fixed price set in 2012. Connie’s Estate and Michael brought a petition for dissolution of the corporation, and Steven and Rose caused Tabs to exercise its option to purchase Connie’s shares for the fixed price.
The Shareholder’s Agreement stated, “if at any time it becomes necessary to determine the Stock Value of the stock of the Corporation, the Stock Value set forth in the last certificate of Stock Value shall be conclusive as to Stock Value and shall be accepted as the Stock Value as of the date on which Stock Value is to be determined.” Tabs’ shareholders prepared Schedule B in 2012, fixing Tabs’ stock value per share at $5,250, nearly double the value determined by a comprehensive appraisal of Tabs performed in 2011.
Michael and Connie’s Estate refused to close on the sale of their shares. Consequently, Tabs sought specific performance to enforce the petition-for-dissolution-triggered Buy-Sell Agreement at the fixed price. Michael and Connie’s Estate argued that (i) the Buy-Sell Agreement was unconscionable, (ii) the fixed valuation of shares became stale with changes in Tabs’ value, and (iii) their claims against Steven for breach of fiduciary duty were sufficient to nullify the Shareholder’s Agreement.
The Court’s Ruling
Ultimately, the court granted summary judgment in Tabs’ favor. The Court rejected contention (i) that the Shareholder’s Agreement was unconscionable, as it applied equally to any shareholder who petitioned for dissolution and all parties had more than a year to review the agreement and receive counsel prior to signing. As to contention (ii), the allegedly stale valuation, the Court noted that the valuation doubled the value of the 2011 Tabs appraisal, and in 2018 in connection with probate of Connie’s Estate, the executors affirmed that the value of Connie’s shares in Tabs was the same as set forth in the Shareholder’s Agreement. The Shareholder’s Agreement, said the Court, was “fundamentally fair.” Finally, the Court rejected the contention (iii) that Michael and Connie’s Estate’s breach of fiduciary duty claims created issues of fact sufficient to avoid summary judgment. “Furthermore, even if the [breach of fiduciary duty] claims were true,” held the Court, “they would not invalidate the buy-sell provision. The buy-sell provision is still enforceable.”
As evidenced by the ruling in Estate of Connie Collins v. Tabs Motors, courts are likely to enforce dissolution-triggered buy-sell rights and fixed value buy-sell agreements subject to the terms of a written owners’ agreement. In Tabs, claims of unconscionability, a years-old certificate of value, and allegations of breach of fiduciary duty were unable to overcome the unambiguous terms of the buy-sell agreement.
Utilizing a fixed value of shares and failing to update the buyout value may lead to litigation over the fixed value’s enforceability. I regularly see fixed valuations in shareholder and LLC agreements that are subject to annual revisions. Rarely are the valuations updated, which lead to disputes among the owners. Rather than fixed valuations, I suggest using valuations that are either based on a formula or an appraisal. Whatever form of valuations are used in buy-sell agreements, counsel for closely held businesses should consider alternatives that are efficient, practical, and accurate.