Shareholders’ agreements often include buyout provisions, governing transfers of stock if an owner leaves the business. These provisions may, for example, prescribe a fixed price, valuation discounts for lack of control or marketability, and procedures for valuing the business during a shareholder buyout. Even if an agreement doesn’t specifically address marital dissolutions, courts sometimes consider buyout provisions when partitioning marital estates that include closely held stock, as this Louisiana appellate court case demonstrates.
In Baumbouree v. Baumbouree, the husband owned a share of his medical practice’s outstanding stock. In a motion for judicial partition of community property, the trial court valued the stock at $1,000 a share pursuant to a shareholders’ agreement.
The agreement’s buyout provision required shareholders to sell their stock to the practice for $1,000 per share upon a shareholder’s death, inability to practice medicine or termination of employment. The trial court ruled that the buyout provision governed the value of “the use and enjoyment of ownership,” not just stock transfers.
On appeal, the wife asked the Third Circuit Court of Appeal of Louisiana to require the medical practice to produce various financial documents to determine the stock’s value. Her business valuation expert claimed such documents were essential to determining going concern value.
Her expert objected to the use of the buyout provision. He contended that the “subjective and static stated value contained in the shareholders’ agreement excludes all of the necessary elements which must be considered in quantifying either the ‘fair market value’ or ‘fair value’ of the community property.”
However, the appellate court affirmed the trial court decision, reasoning that the husband would receive the price prescribed by the buyout provision ($1,000 per share) if any of the triggering events occurred. So, the value of the husband’s interest stood at $1,000, and the medical practice wasn’t required to produce any financial or compensation records.
Also noteworthy was the dissenting opinion. Judge Saunders opined that, while the shareholders’ agreement sets the value upon disposition of the stock, it doesn’t set the value of the continued use and enjoyment of the stock.
Stock ownership gives shareholders voting rights, a right to receive dividends or distributions, and a right to receive a share of the proceeds upon liquidation. Each of these rights provides benefits to the shareholder — and generates value that must be considered when partitioning assets in a divorce, according to the dissent.
Always keep marital dissolution in mind when drafting a buyout provision. When partitioning assets for a divorce, there are no clear-cut rules on when a shareholders’ agreement may be considered. So, it’s critical to consider how these provisions might be perceived in a court of equity.
This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. In addition, any discounts are used for illustrative purposes and do not purport to be specific recommendations.