This sorry story deals with three brothers but it applies to anyone who’s an owner with others in a privately-held business. Corporation? General or limited partnership? LLC? Percentage of an oil well? Mineral rights? Doesn’t matter.
(“Not us.” “We would never disagree.” “We never fight.” “We’re family.” “We’re all on the same page.” Hah. We’ve heard it all, and your lawyer probably has, too.)
I mean, we wish it for you. But if there are company documents that somebody signed sometime, don’t be naïve and pretend they don’t matter and never will.
Example: here’s what happened to Phillip, Gary and Doss (short for “Dorsey”) whose father started Wallace Electric in 1959.
The corporation had to have bylaws, so the lawyer probably came up with a form. Part of it said that if a shareholder-employee left Wallace Electric, the company had the “right and duty” to purchase his stock back at “book value.”
Well, what’s the harm, they probably figured, since the father was the only stockholder and employee. They didn’t give it a second thought . . .
. . . nor did anyone else 29 years later, in 1988, when the father gave shares to Gary, Philip and Doss. Of course, their shares were automatically subject to those Bylaws.
Also in 1988, the brothers signed a “Shareholder Agreement.” It contained similar (though not identical) language to the Bylaws: if a shareholder ceased being an employee of the company, his shares were to be bought back within 60 days at “current value.”
Boring, boring. Of course, the Bylaws and its “book value” term clashed with the Shareholder Agreement’s “current value” language. But oh well.
Fast forward to 1994: Doss was out as an employee. What happened to his stock? Nothing.
Doss didn’t offer to sell his stock back to the Company under the Bylaws, and he didn’t make the offer under the Shareholder Agreement. The Company did nothing to buy Doss’ shares, either.
Nine years later, in 2003, Gary and Phillip realized that Doss still owned his shares, and contacted him about the Company buying them back. Doss refused.
Nobody took any further action, and there was no discussion about book value, current value, or any other price. (Years later, in the brothers’ litigation, Doss’ shares at this time were worth $300,000 or so.)
In 2007, Phillip tried again to buy out Doss’ shares. Same result; Doss refused.
The pot boiled over in 2011: Doss filed suit against Gary, Phillip and the Company for breach of fiduciary duty and other things.
The value of Doss’ shares at this point was about $2 million.
Ah-ha: Phillip and Gary discovered those old signed documents. They sued back, asking the court to order Doss to sell his shares back . . . at their 1994 value which was around $54,000.
Their argument: if the Bylaws had been followed, that would have been the book value of Doss’ shares when he stopped being an employee.
Doss, of course, disagreed. Which led to a trial, then an appeal to the Georgia Supreme Court, then another trial, and then another appeal to the Georgia Court of Appeals.
Okay, reader, you be the judge: Did Doss get to stay a shareholder or did Doss have to sell? If the latter, should Doss get $54,200 for his stock? $300,000? $2 million?
Really, the situation was even worse. The Shareholder Agreement set the “current value” of the stock at the time it was signed to be $1,806 a share. But that amount was supposed to be reviewed and updated each year. Which was never, ever done.
Now you figure that whatever the father had signed in 1959 couldn’t possibly fit when three new shareholders came aboard 29 years later. But nobody looked. Same for when the father died and his shares were distributed to his sons. Same for when Doss stopped working for the Company.
So lest you think bylaws, shareholders’ agreements, operating agreements, et al. are boring or “boilerplate,” stop and consider: a signed agreement amount owners is not going to evaporate, disappear, or disintegrate.
The punchline: go read through what’s in place, no matter how dull you think it may be. And then alert your co-owners that it’s time to face the present.
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The thoughts above are based on a Court of Appeals opinion which was just published. The case is now headed back to the trial court so the brothers can go at each other once again . . . unless they settle. Stay tuned.