Justices rule for company in dispute with ex-officer over share value

A dispute over the valuation of shares has been resolved in favor of a company after the Indiana Supreme Court upheld the discounts that were applied to the valuation. The former company partner who sued previously won a Court of Appeals ruling that increased the value of his shares by more than $1 million.

The high court reinstated a trial court ruling Thursday in Blake B. Hartman v. BigInch Fabricators & Construction Holding Company, Inc., 20S-PL-618.

Blake Hartman, a former officer and director of BigInch Fabricators & Construction Holding Company Inc., owned a minority of shares in the closely held corporation. All BigInch shareholders agreed in 2006 to be bound by a contract that included a buyback clause, which required BigInch to repurchase a shareholder’s interest if the company involuntary terminated the shareholder as an officer or director. Also, the clause required BigInch to pay the shares’ “appraised market value” as determined by a third-party valuation company.

Thus, when Hartman was terminated without cause in 2018, BigInch was obligated to purchase his shares in the company. The appraiser, Wonch Valuation Advisors, applied a fair market value standard and discounted the shares for their lack of marketability and Hartman’s lack of control.

But Hartman sued BigInch, seeking a declaratory judgment that the discounts were inapplicable because the contract didn’t contemplate a fair market value standard. The Parke Circuit Court entered summary judgment for BigInch, but the Indiana Court of Appeals later reversed, finding the discounts could not apply to a closed-market sale.

Under the COA’s formulation, the appellate court found Hartman’s shares should be worth about $3.5 million rather than the approximately $2.4 million value the appraiser placed on his shares — the sum awarded by the trial court.

The Supreme Court reinstated the trial court’s judgment in an opinion written by Chief Justice Loretta Rush.

“(Hartman) asserts it is a ‘settled rule’ that the discounts are inapplicable to the transactions that do not affect control of a company and that are not in the open market,” Rush wrote for the unanimous court. “BigInch contends that the ‘fatal flaw with Hartman’s position’ is that he asks for a ‘fundamentally different’ valuation term than the one he agreed to in the shareholder agreement. We agree with BigInch.”

Acknowledging caselaw that declines to apply marketability and minority discounts to a close-market sale of a noncontrolling business interest — particularly Wenzel v. Hopper & Galliher, P.C., 779 N.E.2d 30, 38-39 (Ind. Ct. App. 2002), trans. denied — Rush wrote that those cases do not govern here because they do not address a sale under a contract that contemplates the shares’ “market value.” She then rejected the “blanket rule” that minority and marketability discounts are not allowed in closed-market transactions, regardless of the terms of an agreement.

“To be sure, the parties here — not the legislature — dictated how to value a former officer or director’s shares when sold to the company,” the chief justice wrote. “And when parties ‘stipulate to a valuation method in a purchase agreement,’ a court ‘will not rewrite an explicit agreement.’ Shriner v. Sheehan, 773 N.E.2d 833, 843 (Ind. Ct. App. 2002), trans. denied.”

The court then rejected Hartman’s reading of the “appraised market value” language, finding that the buyback clause “expressly calls for a standard identical to ‘fair market value,’ which, in turn, contemplates minority and marketability discounts for Hartman’s interest.”

On Hartman’s argument that the agreement contemplated the “market value” of the whole company, Rush pointed to language in the agreement setting the “price per Share” at its “appraised market value.” Further, she wrote, Black’s Law Dictionary defines “market value” and “fair market value” identically. And, Rush wrote, the word “appraised” in “appraised market value,” simply refers to determining the shares’ market value.

“In extraordinary circumstances, we have declined to enforce a contract’s plain and ordinary language when doing so ‘would lead to some absurdity, or some repugnance or inconsistency with the rest of the instrument,’’ Rush wrote. “… But those circumstances aren’t present here – interpreting the agreement’s plain language to allow the discount’s application doesn’t lead to an absurd result or defeat the agreement’s intent. BigInch does not receive a windfall from the discounts because, by definition, a windfall is unexpected — while here, all of the company’s shareholders agreed years ago to be equally bound by the agreement’s terms.”

“… In sum, the plain and unambiguous language of the shareholder agreement calls for BigInch to pay Hartman the fair market value of his shares. We thus conclude that Hartman’s shares could be discounted for their lack of marketability and his lack of controlling interest in the company,” the court concluded. “To the extent that Hartman contends that his shares were discounted ‘arbitrarily,’ we note that he failed to exercise his contractual right to ‘obtain an additional third party valuation company appraisal.’ And he has designated no evidence to show that the appraiser failed to correctly calculate the fair market value of his shares.”