Shareholders who want to avoid protracted litigation over shareholder rights and valuation can specify a valuation protocol in their operative agreements – including a forced redemption on termination of employment of a shareholder for any reason – and the courts will enforce the resulting purchase price.
In its October 1, 2019 decision in Niewiek v Berends Hendricks Stuit Insurance Agency, Inc, the Michigan Court of Appeals enforced the shareholder agreement that provided for the redemption of Niewiek’s stock on termination of employment, for any reason. Niewiek was terminated by Berends. Berends had the stock valued by the appraisal firm which was specified in the shareholder agreement. Niewiek balked, claiming that the purchase price was too low, and claiming errors in the valuation. Protracted litigation ensued, culminating with a trial, then appeal.
What Did the Court Clarify in the Ruling?
The Court of Appeals affirmed the trial court (Kent County Business Court, Hon. Christopher Yates) and held as follows:
- That appraisal agreements are valid and enforceable.
- That the value determined by the appraiser under the agreement was binding and controlling despite the lack of “final” and “binding” language.
- And, lastly but importantly, in order to contest the forced purchase price under an appraisal agreement a party must prove “fraud” or “gross mistake, being a mistake that rises to the level of a failure to exercise honest judgment.” Stated otherwise, the forced valuation price will carry the day absent fraud.
What Does this Mean for Business Owners?
- Business owners can, and should, be proactive by entering into shareholder agreements that specifically address valuation based on all exit paths, including termination of employment, death, or disability.
- Such an agreements are critically important to help avoid protracted and expensive litigation down the road when things get messy, tensions arise, and relationships deteriorate.