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In many small businesses, the owners are subject to a buy-sell agreement. A buy-sell agreement is a contract, signed by all the owners,
regulating the sale of ownership interests in the business. The terms of buy-sell agreements vary, but they most commonly provide that if an owner offers
to sell his interest to a third party, the other owners or the business have the right to purchase the interest offered at a price stated in the agreement.
The agreement therefore functions in theory as an absolute limit upon the price which an owner of the business can receive for selling his or her interest
on the open market.
When the owner of a business is divorced, can the divorce court value the business at an amount higher than the price stated in the agreement?
A small minority of states say no. These states define value for purposes of divorce as fair market value, and accept the premise that the interest cannot
have a fair market value higher than the buy-sell agreement price. E.g., McDiarmid v. McDiarmid, 649 A.2d 810 (D.C. 1994).
The strong majority rule, however, is that the buy-sell agreement price is not legally controlling. States following this position fall into
two different groups. One group rejects the premise that value for purposes of divorce is fair market value, holding instead that value for purposes of divorce
is some form of intrinsic value—the value of the asset as an ongoing concern, in the hands of its present owner, without an immediate sale. A
buy-sell agreement at most determines immediate sale value; it does not determine intrinsic value. E.g., In re Marriage of Huff, 834 P.2d 244
(Colo. 1992) (where husband had no intent to leave law firm in the foreseeable future, buy-sell agreement value was not controlling); In re Marriage of
Dieter, 584 N.W.2d 567, 569 (Iowa Ct. App. 1998) ("It stretches the bounds of reasonableness to value a goose for slaughter when it lays golden eggs");
Bosserman v. Bosserman, 9 Va. App. 1, 384 S.E.2d 104, 108 (1989).
A second group of states accepts the fair market value standard, but nevertheless rejects the argument that the buy-sell agreement price is
legally controlling. Adopting this position, a recent Georgia case concisely summarized its rationale:
We recognize that a minority of jurisdictions hold that in a divorce case the non-shareholder
spouse should be bound by the shareholder spouse's valuation agreement. . . . However, a "clear
majority of courts hold that the value established in the buy-sell agreement of a closely-held
corporation, not signed by the non-shareholder spouse, is not binding on the non-shareholder
spouse but is considered, along with other factors, in valuing the interest of the shareholder
spouse." Cole v. Cole, 82 Ark. App. 47, 110 S.W.3d 310, 314 (Ark. App. 2003). See also
Bettinger v. Bettinger, 183 W. Va. 528, 396 S.E.2d 709, 714, 715 (W. Va. 1990), and cases cited
therein. The rationale for the majority rule is simple-the buy-sell price in a closely-held
corporation can be manipulated and does not necessarily reflect true market value. Bettinger
v. Bettinger, supra; Bosserman v. Bosserman, 9 Va. App. 1, 384 S.E.2d 104, 108
(Va. App. 1989). In our view, the majority rule is more sound and it was applied properly in this case.
Barton v. Barton, 2007 WL 37750, at *1 (Ga. Jan. 8, 2007).
In short, while the buy-sell agreement price is an absolute limit on paper, it is generally not an absolute limit in practice. When the owners
of a business decide to sell their interests together, the buy-sell agreement is frequently amended to permit sale at a higher price. Such agreements are
sometimes even amended to permit sale by an individual shareholder, if the other shareholders approve of the sale. In addition, buy-sell agreement prices are
often set artificially low, for the purpose of discouraging sale or even defrauding the spouses of the owners in the event a divorce action is filed. Because
buy-sell agreements are hardly ever signed by the owners' spouses, such agreements in some situations are a collusive attempt by the owners to benefit themselves
by artificially reducing the on-paper value of the company. The reduction in practice is artificial, for as noted above, the owners can amend or even rescind
the buy-sell agreement whenever it becomes burdensome. If buy-sell agreements were legally controlling on the value of businesses for divorce purposes, it
would be too easy for the owners of such businesses to collusively manipulate their value.
The fact that the buy-sell agreement is not controlling does not mean that it is irrelevant to the valuation process. Any valuation made by a
qualified source is admissible evidence of value, and the owners of a business are certainly qualified to value it. When a buy-sell agreement results from an
honest and neutral attempt to value the business, and not from a collusive attempt to discourage withdrawal or limit the rights of the owners' spouses, the
courts have often accepted the agreement value. See In re Marriage of Micalizio, 199 Cal. App. 3d 662, 245 Cal. Rptr. 673 (1988) (although agreement
is not conclusive, it is error not to consider it at all); Sweeney v. Sweeney, 534 A.2d 1290 (Me. 1987) (where owners signed the agreement in good faith,
trial court properly used agreement value, even though it included no sum for goodwill); Amodio v. Amodio, 70 N.Y.2d 5, 509 N.E.2d 936, 516 N.Y.S.2d
923 (1987) (accepting agreement value where expert could not explain why higher value was appropriate despite agreement).
Conversely, the agreement value has been rejected when it does not result from a good-faith effort to value the company. See In re Marriage
of Huff (agreement failed to include goodwill as element of business' value, and owning spouse's expert admitted that its purpose was to discourage withdrawal
by undervaluing the business); Houchens v. Boschert, 758 N.E.2d 585 (Ind. Ct. App. 2001) (trial court placed little weight on agreement valuing business
at book value, where it was signed after the date of filing of divorce case but had retroactive effect; obvious possibility that agreement was signed for purpose of
reducing value of business for divorce purposes); Berenberg v. Berenberg, 474 N.W.2d 843 (Minn. Ct. App. 1991) (corporation had redeemed a prior shareholder's
interest for more than the agreement value, which was substantially below the fair market value of the stock); Butler v. Butler, 541 Pa. 364, 663 A.2d
148 (1995) (1984 agreement used fixed dollar value rather than valuation formula, and fixed value had not been updated since earlier 1974 agreement; value was stale,
and agreement was not controlling).
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