Opinion ID: 2379514
Heading Depth: 1
Heading Rank: 1

Heading: Buy-Sell Agreement

Text: Ordinarily the value that people put on an asset is the most productive place to start such an inquiry: It would be shortsighted and unwise for courts to reject out of hand consensual solutions to vexatious personal martimonial problems that have been advanced by the parties themselves. Petersen v. Petersen, 85 N.J. 638, 645 (1981) (enforceability of automatic escalation clause in marital settlement). Stern v. Stern, 66 N.J. 340, 345 (1975), recognized that placing a precise or even an approximately accurate value upon an interest in a professional partnership, when the partner whose interest is in question intends to continue as a member of the firm is no easy matter. In that case, the Court considered the most accurate and certainly the most useful method for purposes of equitable distribution to be the formula for the calculation and payment of a partner's interest to his personal representative upon death. Id. at 346. But the circumstances were different from those presented to the court here. The evidence in Stern was that the formula was revised quarterly, was obviously intended to reflect the elements of the enterprise's worth, other than the individual's capital account, and that the payments occasioned by death were to be funded with the proceeds of life insurance on the lives of the several partners. Id. The Stern Court held that a trial court would be justified in adding to this sum the value of defendant's capital account, treating the total as the presumptive value of the defendant's partnership interest in the firm. Id. Once it is established that the books of the firm are well kept and that the value of the partners' interests are in fact periodically and carefully reviewed, then the presumption would be subject to attack only upon the submission of clear and convincing proofs. Id. at 346-47. Those elements were not present here. The buy-sell agreement among the three stockholders prohibited a transfer of the stock unless offered to the other stockholders or the corporation at a price computed in the agreement. The agreement provided that each partner's share would be determined on the basis of book value, provided that the minimum value of defendant's interest was $25,000. It provided that book value was to be established by the corporation's accountant. In the event of disagreement with a shareholder's accountant, then a Certified Public Accountant shall be appointed by the presiding judge of the Somerset County Court    [who] shall determine the book value of the shares of corporate stock in accordance with this formula and the determination by said Accountant shall be binding upon all parties to this Agreement. The formula established by the agreement specifically excluded goodwill or other intangible assets but otherwise specified how accounts receivable, inventory, machinery, fixtures, taxes, and life insurance policies were to be valued. In addition, the agreement provided for installment payments over a period of years with stated interest. The agreement also provided that the parties would periodically fix a value in a Certificate of Agreed Value. No Certificate existed here. We agree with the trial court's conclusion that this buy-sell should not control because it did not contemplate the circumstances when the stockholder's status with the corporation and his fellow stockholders was to remain the same. Under these circumstances, Polycel's assets of goodwill and other intangibles (including considerable technical expertise) should have been included to reflect fair value. We note that the procedure endorsed in Stern  adding to the base value set by the partnership agreement the value of the capital account that was outside the agreement, 66 N.J. at 346  might be used when a corporate buy-sell is similarly trustworthy but incomplete. The addition of goodwill calculated in accordance with the guidelines of Dugan v. Dugan, 92 N.J. 423 (1983), would yield presumptive evidence of value. Determination of an appropriate capitalization rate would be based upon rates of return in comparable publicly traded securities, or on sales of comparable businesses. See infra, at 51. Here, neither party sought to rely upon the buy-sell agreement, although the defendant's expert testified that he had recently calculated the value on that basis at $92,473. The effect of a buy-sell agreement in a matrimonial settlement cannot be regarded as facially dispositive, but must be considered in light of all of the circumstances and its provisions. See Rev.Rul. 59-60, at § 8. A central inquiry is whether it represents an arm's length agreement to fix real value for the triggering event that has occurred. See Hughes v. Sego Int'l Ltd., 192 N.J. Super. 60 (App.Div. 1983) (buy-sell agreement not controlling in forced liquidation since parties contemplated only death or voluntary sale when fixing valuation formula); Rogers v. Rogers, 296 N.W. 2d 849 (Minn. 1980) (buy-sell agreement given two-step effect for purposes of marital distribution). [3] Finally, the defendant argues that the court should not value his interest above its buy-sell value, since if he must sell his shares, the price he would receive would be limited by the buy-sell restriction. But there should be no reason to sell the shares since the court can fashion the distribution so that a sale need not occur. Furthermore, to give the buy-sell agreement conclusive effect would not recognize the realities of the present situation: The shareholder will not sell the stock and, one hopes, will not die. In other words, he will continue to experience the benefits of being a 22% shareholder and an employee. Under the conditions stated in Stern, an up-to-date buy-sell agreement will provide presumptive evidence of value of a minority share in a firm. All those conditions were not present here and so the court below was obliged to consider the other proofs. It may choose to give evidentiary weight to the agreement insofar as it is reliable although incomplete.