Advanced Underwriting Consultants

Question of the Day – August 8

Ask the Experts!

Here’s the question of the day.

Question: Does a business owner’s spouse need to sign the business buy-sell agreement?

Answer: Given a choice, most attorneys would have the owners’ spouses consent to a buy-sell agreement for the business.

Each state has its own rules about whether a spousal consent is required to enforce a buy-sell agreement against that spouse.  Here’s an example of the Texas case of Mandell v. Mandell, 2010 WL 1006406, (2d Dist. TX 2010).

Susan and Lance Mandell, both doctors, were married in 1989.  While married, Lance became an employee and minority owner of a medical practice (the “practice”) organized as a corporation.  Lance held 22,000 shares.

Lance entered into a shareholders agreement with the practice that included buy-sell provisions.  The terms of the agreement dictated how shares could be transferred voluntarily in the event of withdrawal or retirement.  The agreement also included language requiring an involuntary transfer of shares in the event of the divorce of an owner.

The agreement provided that if a shareholder divorced from his spouse, the divorcing shareholder had the obligation to buy out his ex-spouse’s interest in the practice at 50 cents a share.  If the divorcing shareholder failed to perform the buyout, the right and obligation to purchase the shares would shift to the practice.

The 50 cent a share valuation was consistent for all the triggering events described in the buy-sell agreement.

Susan sued the practice and her ex-husband, arguing that the $11,000 value for Lance’s interest in the practice was unfairly low.  Her main argument was that since she did not sign the shareholders agreement, she was not bound by its terms valuing the stock in the event of a divorce.  Susan and her valuation experts believed the fair value of Lance’s interest in the practice to be about $1 million.

The court held that the buy-sell valuation was binding on Susan, even though she did not sign the agreement.  In so finding, the court noted that the agreement and buyout price would also be binding on Lance; that Lance would never be entitled to sell his shares himself for anything other than 50 cents a share.

Since the shares were only worth $11,000 to Lance, the court reasoned that it would be unfair to assign them a higher value for Susan’s benefit.

The result in the Mandell case can be contrasted with Barton v. Barton, 639 SE 2d 481 (Ga. 2007).  In Barton, the husband owned half the stock in a closely held corporation.  He entered into a buy-sell agreement with the other owner of the company.  The buy-sell agreement provided that in the event of divorce of either owner, the non-divorcing shareholder would have the right to purchase the divorcing owner’s stock.

As was the case in Mandell, the wife did not consent to the agreement.

In its Barton decision, the Georgia Supreme Court ruled that the agreement did not bind the wife to the valuation in the buy-sell agreement.  The court reasoned that because the wife did not consent to the buy-sell agreement, she could not be bound by the valuation in it.  Thus, the original divorce court’s decision to use an arbitrator’s 50% higher value in dividing the marital assets was upheld.

The Barton decision reminds us that where possible, the spouses of parties to a buy-sell agreement should formally consent to the agreement’s terms.

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