A buy sell agreement is an effective tool to create a predictable value for shares in a closed (non-public) corporation. However, what happens if the buy sell provision refers to an exhibit that is not attached and the formula simply cannot be applied as intended in the agreement? The New York Appellate Division dealt with that issue in Sullivan v. Troser Management, Inc.,    N.Y.S.2d    , 2010 WL 2636019 (N.Y.A.D. 4 Dept.), 2010 N.Y. Slip Op. 05894

That case was decided on July 2, 2010. “[T]he dispute … relate[d] to the value of an 18% stock interest in a ski resort under the parties’ “buysellagreement (“agreement”).” The Court held that “the purchase price provision of the agreement [was] unenforceable, and the value of plaintiff’s stock should therefore be determined pursuant to the formula set forth in the unrelated New York case, Lewis v. Vladeck, Elias, Vladeck, Zimny & Engelhard(57 N.Y.2d 975), i.e., based on a percentage interest in defendant’s assets.” Id at 1.

The Court concluded that “[t]he ‘Purchase Price’ provision of the agreement expressly states that the price of the shares of stock shall be ‘an amount agreed upon annually by the Stockholders as set forth on the attached Schedule A.’ It is undisputed that no Schedule A exist[ed]. That provision further state[d] that, ‘[i]n the event that no annual value is established, the value shall be the last agreed upon value except that if no such agreed upon value is established for a period of two years, the value shall be the last agreed upon value increased or decreased by reference to an increase or decrease in book value of [defendant] from the date of the last agreed upon value to the date of death or disability” of the stockholder seeking to sell his or her shares.’ Id at 1

The problem was that “the stockholders … never agreed upon a value of the stock, and … the purchase price of [the] shares therefore [could] not be ascertained in accordance with the terms of the agreement… Indeed, there is no evidence in the record that plaintiff has ever agreed upon a value of the stock.  Id at 2

Therefore, the method of valuation was based solely on a percentage interest (in this case, 18%) in the assets of the ski resort.

Comments/Questions: ljm@gdnlaw.com

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