Buy-Sell Formula Doesn�t Control Valuation Of Corporate Stock At Divorce

The valuation formula for shares in the buy-sell provision of a closely-held corporation�s stockholder agreement does not control the stock�s value for purposes of dividing marital property, a court has ruled. A wife sued her husband for divorce, seeking an equitable division of their property. The husband owned one-half of the stock of a closely-held corporation. That stock was subject to a buy-sell provision which provided that, in the event of the husband�s death, disability or bankruptcy, or some other triggering event, the other shareholder had a right to purchase the husband�s stock at a price to be determined by a formula. Under that formula, the value of the husband�s stock would have been fixed at $342,200. However, an arbitrator found the stock�s fair market value was $508,000, and the division of marital property was based on that valuation. The husband objected, arguing that the wife should be bound by the terms of the buy-sell provision. The Court disagreed. A clear majority of courts hold that the value established in the buy-sell agreements of a closely-held corporation, not signed by the non-shareholder spouse, is not binding on the non-shareholder spouse but is considered, along with other factors, in valuing the interest of the shareholder spouse. The rationale for the majority rule is simple � the buy-sell price in a closely-held corporation can be manipulates and does not necessarily reflect true fair market value. The majority rule is sound and it was applied properly in this case.