Opinion ID: 718662
Heading Depth: 2
Heading Rank: 1

Heading: Acquisition of Sligo and the Restrictive Stock Transfer Agreement

Text: In July, 1988, Raymond H. Cornell (Cornell), and J. Richard Hauser (Hauser) engineered a leveraged buyout of Sligo, a St. Louis-based industrial supply distributor. (J.A. at 4-5, 37, 96-97.) Cornell and Hauser each owned fifty percent of Sligo's outstanding shares under the terms of the acquisition, and each served as an officer and director of Sligo. As a condition of financing this acquisition, Sligo's lenders required it to purchase and maintain life insurance policies in the amount of $1 million on the lives of Cornell and Hauser and required that the life insurance proceeds be applied toward repayment of the financing loans if either Hauser or Cornell died before the loans were repaid. Sligo later purchased additional life insurance policies on the lives of Cornell and Hauser in the amount of $500,000.00 each. Sligo was the beneficiary of these life insurance policies. In December, 1988, Hauser and Cornell entered into a Restrictive Stock Transfer Agreement (Agreement) to restrict each owner's ability to transfer his shares of Sligo stock. (J.A. at 969.) This Agreement provided Sligo with an option to purchase an owner's share upon certain events and under certain conditions, as more fully set forth below. After executing the Agreement and pursuant to its terms, Cornell transferred his shares of Sligo stock to an inter vivos revocable trust (the Trust), of which he was the sole trustee. Under the Agreement, Sligo's option was triggered when a specified transfer occurred. 2 Its option read in pertinent part: 3.4 Purchase Options Upon Death of a Shareholder or Other Involuntary Transfers. ... (b) First Option of Corporation. Within thirty (30) days of the Corporation's receipt of actual notice of a Transfer ... the Corporation may exercise an option hereby granted to the Corporation to purchase all, but not less than all, of the Shares so Transferred ... for the price and upon the other terms provided in Article V hereof.... (J.A. at 13.) The Agreement treated the death of a shareholder as a transfer which accordingly triggered Sligo's option to purchase the deceased shareholder's shares. The Agreement also established two mechanisms for setting the value of the shares in the event of a transfer. The first was a fail-safe provision which read: 5.2 Market Value. Unless otherwise specified in a certificate of agreed value then in effect pursuant to Section 5.3 hereof, the Market Value of Shares as used herein shall mean: ... (b) Death and Insurance. In the case of a sale and purchase of Shares by the Corporation under [the terms of its option] as a result of the death of a Shareholder if the Corporation receives life insurance proceeds upon the death of such Shareholder, the Market Value shall mean the book value of said Shares for the period ending December 31, 1989, and One and one-half (1 1/2) times said book value thereafter. Book value shall conclusively be determined by the accountant or accounting firm then servicing the Corporation. (Id. at 16 (emphasis added).) As an alternative, the Agreement provided that the shareholders could change the Market Value as determined under Section 5.2(b) by executing a Certificate of Agreed Market Value. The amount agreed upon in such a certificate superseded the Market Value as set out in Section 5.2(b). Specifically, Section 5.3 of the Agreement provided: 5.3 Certificate of Agreed Market Value. The Shareholders and the Corporation may, at any time and from time to time, determine Market Value as used in Section 5.2 hereof by executing and filing with the Corporation a written instrument wherein such determination is set forth, whereupon, for the period of time stated in such instrument, Market Value so determined shall supersede Market Value as determined in Section 5.2.... (Id. at 16-17.) Cornell and Hauser executed a Certificate of Agreed Market Value effective for the period August 1, 1988 through December 31, 1988. They did not execute a subsequent Certificate of Agreed Market Value.