One of These Things is Not Like the Other: Stock v. Asset Purchase Agreements

One of These Things is Not Like the Other: Stock v. Asset Purchase Agreements

      Lauder v. Lauder, an unpublished ruling of the Kentucky Court of Appeals, highlights, on the one hand, the need for careful drafting of agreements within corporations and, on the other, an appreciation for the fact that while a contract may give certain rights, it does not follow that it gives other rights.  Lauder v. Lauder, 2008 WL 1757529 (Ky. App. April 18, 2008) (discretionary review denied March 11, 2009).

      Jasper and Sheila Lauder, husband and wife, were the owners of Carlton-Lauder Funeral Home, Inc. as well as the owners of the improved real property from which the corporation operated.  They would ultimately gift 16% of the stock of the corporation to their son Brian, retaining to themselves the balance of 84%.  In 1997, Jasper, Sheila and Brian entered into a stock purchase agreement providing, inter alia, rights of first refusal with respect to any proposed transfer of shares to a third party.

      Ultimately, Jasper and Sheila determined that the corporation should sell all of its assets to certain third parties, and to that end entered into an asset purchase/sale agreement.  Brian filed suit against his parents and the corporation (the opinion does not address whether the suit was direct, in which case it should have been dismissed ab initio, or derivative), asserting that Jasper and Sheila had misappropriated corporate assets, they being used to improve the real property they owned in their individual names and also in satisfaction of other personal expenses, asserting as well that the:

The act of selling the corporate assets violated “the purpose, intent, and terms of” the Stock Purchase Agreement.  2008 WL 1757529, *2.

      The Circuit Court granted Jasper, Sheila and the corporation summary judgment, from which Brian appealed, including on the basis that “a party to a buy-sale agreement regarding stock cannot circumvent the agreement by selling all of the corporation’s assets.”

            Ultimately rejecting the assertion that the asset sale violated his rights under the stock purchase agreement, the Court of Appeals wrote:

Brian acknowledged in his response to Jasper and Shelia’s motion for summary judgment that the stock purchase agreement made no mention of the sale of assets.  However, he mistakenly equates the sale of the corporation’s assets with the sale of stock.  The stock purchase agreement does not control the sale of the corporate assets.

By selling its assets, the corporation did not sell its stock; rather, compensation was received by the corporation in exchange for the assets it sold.  This money was retained by the corporation used to pay corporate debt.  The remaining balance is in a corporation account.  Brian did not dispute this assertion.  Thus, the claims that the sale of assets violated the stock purchase agreement lacks merit.  2008 WL 1757529, *3.

      Obviously, in retrospect, the son realized that while he had negotiated with his parents an agreement that, should they determine to sell their stock, he would have a right of first refusal with respect thereto, he had not negotiated for an agreement that the corporation could not itself sell its assets without affording him at least a right of first refusal with respect to being the purchaser.  Equally obvious, his efforts to argue that an individual right to acquire stock in a corporation should be read to as well bind the corporation as to a sale of its assets was unavailing.