A recent Wisconsin Supreme Court opinion filed June 25, 2010, Ehlinger v. Hauser and Evald Moulding, Inc., 2010 WI 54, is a candid reminder that co-owners of a business should not only take the important step of entering into a written Buy/Sell Agreement to determine how important issues such as death, disability, divorce, bankruptcy, etc. will be dealt with between them, but also in doing so, should take the important steps of discussing fully the ramifications of their agreement so that they have a clear understanding of its key terms and conditions.
In Ehlinger, the Wisconsin Supreme Court upheld the lower courts’ rulings that, among other things, a Buy/Sell Agreement between the co-owners of a Wisconsin Corporation was unenforceable because the court determined that the undefined term "book value" rendered it so. The buyout agreement stated that if one of the shareholders becomes totally disabled, the non-disabled shareholder is entitled to purchase his shares at "book value." In this case, the contract did not define "book value" and because the records of the corporation were so deficient that a special magistrate skilled in accounting could not determine a value which accurately reflected the corporation’s assets and liabilities. From the court record, the Supreme Court noted that not only was "book value" not defined and not determinable due to deficient corporate records, but it was also clear that the parties did not really understand each other when they entered into the buyout agreement as to what "book value" would actually mean should one of them become totally disabled. Ultimately, this decision, after over seven (7) years of protracted litigation, resulted in the appointment of a receiver for the assets of the business.
Ehlinger again highlights the need for co-owners of a business to take the time to ask each other the hard questions with the guidance of their accounting and legal professionals and come to a well considered agreement among themselves before moving ahead too far with the business operations.