Shareholders Agreement Prescribes Value of a Medical Practice
Courts often consider shareholders’ agreements when divvying up marital estates that include private business interests — regardless of whether marital dissolution was on the radar when the agreement was signed.
This is the story of a buyout provision that was used to value community property, even though the wife refused to sign the shareholders’ agreement. (Baumbouree v. Baumbouree, La. App. 3 Cir., 202 So.3d 1077, No. 15–1053, July 13, 2016.)
Buyout Provision Prevails
The husband (a pediatrician) owned one share of his medical practice’s outstanding stock. In June 2014, he filed a petition for divorce and judicial partition of community property.
The trial court valued the stock at $1,000 a share pursuant to a shareholders’ agreement, which had been signed by the husband in September 2013. The agreement’s buyout provision required shareholders to sell their stock back to the practice for $1,000 a share upon a shareholder’s death, inability to practice medicine or termination of employment.
The wife had previously refused to sign the shareholders’ agreement. She claimed that the husband asked her to sign it after they had “physically separated and were contemplating divorce.”
Although the stock was community property for divorce purposes, it was issued in only the husband’s name. So, the trial court held that he had the exclusive right to manage the stock. The court also said that, although the buyout provision didn’t address divorce or asset partition, it did govern “the ‘value’ of the use and enjoyment of ownership.”
Trial Court Decision Upheld
The wife appealed. She argued that the trial court had assigned an “arbitrary price … not based on any indicia of financial value.”
Her business valuation expert concluded 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.” So, the wife asked the court for financial statements and other documents to help her expert determine the going concern value of the stock, including the value of goodwill.
The Third Circuit Court of Appeal noted that, in Louisiana, goodwill attributable to the personal and professional qualities of the other physician stockholders is specifically excluded from a marital estate.
Moreover, the shareholders’ agreement had been signed by various physician-employees who represented third parties without a financial interest in the shareholder’s divorce. Although the agreement mentioned several specific triggering events, it also stipulated that the agreement also wasn’t “limited to the occurrence of events” specified in the agreement.
The agreement hadn’t been amended or modified on the date of the divorce filing. So, the husband would receive only the price prescribed by the buyout provision if any of the triggering events occurred.
As a result, a majority of the appeals court rejected the wife’s arguments, reasoning that the $1,000-a-share price based on the buyout provision was relevant for purposes of a divorce.
The decision wasn’t unanimous, however. A dissenting opinion said that the case should be remanded to the trial court for further proceedings. The primary point of contention was that none of the events that would trigger the buyout provision were present.
The dissenting opinion went on to note that although the shareholders’ agreement set the value for stock transfers, the husband wasn’t transferring his interest. He would continue to use and enjoy the benefits of stock ownership, such as voting rights, a right to receive dividends or distributions, and a right to receive a share of the proceeds upon liquidation.
Will a court rely of the valuation provision contained in a shareholders’ agreement when an owner is filing for divorce? There’s no cut-and-dried answer. So, it’s important to disclose any shareholders’ agreements to your valuation expert.
It’s also a good idea to work with a valuation professional when drafting buy-sell agreements. This can help ensure all relevant valuation issues are addressed in the agreement and minimize potential problems in any future litigation.
LOUIS J. CERCONE, JR., CPA, CFE, CFF, ABV, ASA, CVA
Lou is the Managing Director of Brisbane Consulting Group in charge of business valuations, forensic accounting, and litigation support services. He has extensive valuation experience and has served as a financial consultant and expert to attorneys in the economic aspects of matrimonial dissolution. He has been engaged in several forensic accounting cases and has served the judiciary as a court appointed expert and receiver for financially troubled companies. He has testified as an expert witness in State Supreme Court and Federal Court. Lou has also been engaged in the quantification of lost income in determining business interruption claims for insurance adjusters.