Blake Hartman (“Hartman”) was a former officer and director of BigInch Fabricators & Construction Holding Company, Inc. (the “Corporation”), a closely held corporation.  He is also a minority shareholder of the Corporation.

In 2006, Hartman and the other shareholders of the Corporation agreed to be bound by a contract which contained a buyback clause requiring the Corporation to repurchase a shareholder’s interest in the Corporation if the Corporation involuntarily terminates the shareholder as an officer or director.  The clause further provided that the Corporation must pay the former officer or director the “appraised market value” of the shares as determined by a third-party valuation.

In 2018, Hartman was terminated without cause, triggering this contractual clause requiring the Corporation to purchase Hartman’s shares in the Corporation.  The Corporation hired a third-party appraisal company to appraise Hartman’s interest and applying a fair market value standard, the appraiser discounted the shares for their lack of marketability and Hartman’s lack of control.

Hartman filed suit against the Corporation, asserting that the discounts are inapplicable because the shareholder agreement didn’t contemplate a fair market value standard.  The trial court found in the Corporation’s favor, finding that the term “appraised” merely states how to determine “market value” and that “market value” and “fair market value” are synonymous terms, which are consistent with the appraiser’s approach.  The Indiana Court of Appeals disagreed, concluding that the discounts could not apply to any closed-market sale.

The Indiana Supreme Court disagreed and held that the discounts used by the appraiser did apply in this case.  In Indiana, parties are free to enter into contracts and the courts, when construing a contract’s terms, give the plain and ordinary meaning to the language used.  The Supreme Court stated that prior caselaw prohibiting the use of discounts in determining market value did not apply where the terms of the contract expressly called for “appraised market value.”  The Court held that the terms “appraised market value” and “fair market value” are synonymous terms which contemplate an appraisal value of the terminated shareholder’s individual interest in the company—not the value of the company as a whole.  As such, the shareholders agreed to a valuation of their shares as if they were sold on the open market.  Such a valuation can include discounts for lack of marketability and lack of controlling interest in the Corporation.  Therefore, the Indiana Supreme Court held that those discounts could be applied to the buyout of Hartman’s shares by the Corporation.

Should you have specific questions regarding the above, please contact Carl J. Hall at Hodges and Davis, P.C.


Hodges & Davis, P.C.- March 2021

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