May 14, 2021
Recently, the Indiana Supreme Court handed down an important decision in Hartman v. BigInch Fabricators & Construction Holding Co., Inc. The Court held that when parties enter into a buy-sell agreement, courts will follow the plain language and ordinary meaning of the agreement unless it is ambiguous. The Court also upheld a neutral arbitrator’s decision to discount a minority shareholder’s interest in a closely held corporation to account for the lack of marketability of the interest in the arbitrator’s determination of fair market value.
This decision affirms long-standing Indiana contract law that courts defer to parties’ contracts unless the language is unclear, ambiguous, or absurd. Here are a few takeaways from the case to keep in mind:
Indiana Courts Firmly Defend Freedom to Contract
Indiana allows parties to control their own fate. This case reiterated the strong desire of the Indiana Courts to follow the terms of an agreement and adheres strictly to the terms in the parties’ agreement. The Supreme Court allowed for minority and marketability discounts to apply to a closely held corporation because of the terms of the buy-sell agreement. In contrast, in Wenzel v. Hopper & Galliher, P.C., 779 N.E.2d 30 (Ind. Ct. App. 2002), the parties did not have a buy-sell agreement, but the Indiana Professional Corporations Act allowed for a compulsory buyback of a shareholder’s interest. The Court found as a matter of public policy that minority and marketability discounts do not apply when determining the market value of shares of a closely held corporation under the Act.
Well Defined Terms
Always ensure that the terms of a buy-sell agreement are clear and unambiguous. When terms of an agreement are well-defined, litigation can often be avoided. In this case, the Courts resolved the parties’ disagreement, but the case went through three levels of the court system to get that finality, costing the parties time and money.
Method, Process, and Formula
The method, process, and formula for determining value needs to be clear. Clarity means litigation is less likely and disputes can be resolved in a timely manner. In this case, the Court had to define appraised market value and determined that the parties followed the terms of the agreement. The Court also noted that the complaining shareholder could have exercised a right to obtain an additional third-party valuation but chose not to, which demonstrates that a party should utilize the process defined by the agreement prior to filing suit.
Buy-sell agreements are critical to any business with more than one interest holder. Putting off creating these agreements often means surrendering a business’s fate to the determination of the Courts. Warrick & Boyn, LLP, has significant experience drafting, negotiating, and litigating buy-sell agreements. We can review what you currently have in place and help you redefine or upgrade your terms as needed. Contact us today.