Fixed-Price Buy-Sale Agreements: What Goes Around Comes Around

Fixed-Price Buy-Sale Agreements: What Goes Around Comes Around

      Just last week, at the Business Planning class at UK law, I had the students read the venerable Kentucky decision Krebs et al. v. McDonald’s, Ex’x, 266 S.W.2d 87 (Ky. 1953). Therein, the court enforced the provision of a buy-sale agreement requiring a deceased shareholder to be bought out of the corporation at a price that had been fixed many years previously; consequent to the passage of time that agreed price no longer reflected the intrinsic value of the shares. Ultimately, the agreement, having been entered into, would be enforced as written.

      This week, in his blog New York Business Divorce, Peter Mahler reviewed a recent decision from New Jersey in which, all else being equal, the same rule was applied. In that blog post, Another Reason Not to Use Fixed-Price Buy-Sale Agreements (Jan. 14, 2019; HERE IS A LINK to that posting), Peter reviewed the decision rendered in Namerow v. PediatriCare Associates, LLC (Nov. 29, 2018). In this instance, the operating agreement contained an initial determination of firm value of $2.4 million. Even though the operating agreement invited the members to update the value from time to time, they never did so. It did contain a provision that if the price had not been adjusted for more than two years, the value would be adjusted “to reflect the increase or decrease in the net worth of the Company, including collectible accounts receivable, since the last agreed upon Value.” As Peter noted in his blog post, one of the deficiencies of this provision was a failure to address who would make the determination as to the adjustment in value.

      An appraisal performed by the LLC yielded a value of $4.45 million, which would have netted Dr. Namerow in excess of $1.1 million. Keep that figure in mind. He rejected that offer.

      At trial, applying the terms of the operating agreement, it was determined that the firm was worth slightly in excess of $3.2 million, yielding to Dr. Namerow $805,779, an amount significantly less than he had been offered two years previously. In making this determination, it wrote:

This Court is mindful that Plaintiff, as the first member of PediatriCare to retire, may feel as though his efforts as one of the founding members and an established physician for 38 years are being shortchanged, in this Court to some extent does not disagree. However, based on the language of the operating agreement and the lack of any updates to the Certificate of Agreed Value, the Court is left with little discretion but to apply the appropriate formula as agreed upon in 2001.