New England Biz Law Update
For more than 125 years, the law has been settled here in the Commonwealth “that one may agree to sell his property at a price to be determined by another, and that he will be bound by the price so fixed[.]” New England Trust Co. v. Abbott, 162 Mass. 148, 154 (1894). While such agreements haven’t prevented business owners from lengthy court battles over seemingly agreed-upon procedures for valuing a shareholder buy-out, practitioners who represent closely-held companies and their owners know from experience that a clear, well-drafted appraisal process can dramatically narrow the scope and likely duration (not to mention the expense) of such fights. Indeed, a properly followed contractual appraisal process should foreclose litigation entirely, because “the correctness of the principles and methods of valuation adopted by the appraisers cannot be inquired into by the courts, in the absence of fraud, corruption, dishonesty or bad faith….” Eliot v. Coulter, 322 Mass. 86, 91 (1947).
Steven M. Veenema
Given these time-honored principles, now in place for longer than anyone still practicing has been a member of the bar, one might expect a common standard to have developed through which business owners express, as the SJC put it upon reaffirming Eliot in 2018: their “shared desire for finality through a means other than adjudication by a court or an arbitrator.” Buffalo-Water 1, LLC v. Fidelity Real Estate Co., LLC, 481 Mass. 13, 23 (2018). After all, any benefit of resolving a valuation dispute only after years of litigation and a battle-of-the-experts trial is probably limited to the lawyers and experts involved—not so much the parties.
Yet all too often, clients find themselves needing to separate from their business partners with little or no direction in their governing documents about how to resolve the critical—and usually hotly contested—question of what price will govern a buy-out. By then, enough animosity has usually arisen to make an agreed solution seem impossible. But even when litigation is unavoidable on certain issues, the costly and complex question of valuation is still likely better resolved by agreement, particularly if one party is committed to a fantasy price with no basis in reality. Such a person, though beyond reason on the topic of price, may still be amenable to a process by which their position stands at least a theoretical chance of being validated. Convincing that person to commit to such a process is likely the best means of preventing them from later litigating in pursuit of their fantasy. Indeed, cases applying Eliot in the real property context include some helpful examples of courts denying plaintiffs precisely that opportunity.
In Buffalo-Water, for example, the SJC affirmed the dismissal of a complaint challenging a fair-market-value appraisal of a Boston office building, where the price was determined after two party-appointed appraisals, the average of which would have been controlling if they were within 5% of one another. When the party appraisers came nowhere close, they appointed a third appraiser to decide the binding number, which was conclusive as long as it landed somewhere between the two party valuations. Although the third appraisal met that condition, the seller disputed it, in part because it was decided by Cushman and Wakefield, with which Fidelity, the buyer, had an existing relationship as its national real estate representative. For the seller, this created an “appearance of bias” sufficient for judicial review. The SJC disagreed, and refused to add bias to the limited grounds available for challenging an agreed appraisal.
Similarly, in State Room, Inc. v. MA-60 State Assocs., L.L.C., 84 Mass. App. Ct. 244, 252 (2013), the appeals court affirmed the dismissal of a complaint challenging a different three-appraiser approach to establishing fair market rent in a lease dispute. Under that contract, three qualified appraisers (one appointed by each party, and the third jointly selected by the party appointees) made separate determinations that were then averaged. The rate was furthest from that average was then discarded, and the governing fair market rent was decided based on the average of the remaining two figures. Unhappy with the resulting number, the lessee sued, arguing that the process resulted in a 40% overstatement of fair market rent, based in part on the comparable leases considered by the appraisers. Reasoning that nothing the appraisers decided was beyond the scope of their authority under the lease, including their selection of comparable leases, the appeals court affirmed dismissal of the complaint.
In both cases, the “aggrieved” party was stuck with the price established by the agreed process, and could not litigate for a different number—at least not past a motion to dismiss. Finality was thus achieved without protracted litigation, and without leaving the critical determination to a judge or jury, with only diametrically opposed experts as guides. And while experienced practitioners have likely seen and can conjure any number of different valuation frameworks with different incentive structures to include in shareholder buy-sell agreements, the provisions in these real estate cases offer a good place to start in considering reasonable options.
One important word of caution, however, for counsel overseeing the execution of any agreed process: be sure the contract is strictly followed, and that no one strays beyond its boundaries. Particularly when a contract specifies a “criteria or formula for the valuation,” it will still be up to the courts to “determine whether the appraiser operated within the boundaries of those standards.” State Room, 84 Mass. App. Ct. at 250; see also Terrell v. Kiromic Biopharma, Inc., 297 A.3d 610, 622 (Del. 2023) (“questions about the scope of the appraisal, coverage, exclusions, and the provisions of the appraisal clause, itself are legal questions for the courts.”) (internal citations and quotations omitted). The worst-case scenario would be to successfully conclude an expensive negotiation and valuation, only to end up in litigation over the very issue that should have been resolved by that process.
Steven M. Veenema is a member of the Business Litigation Department at Sheehan Phinney. He helps clients resolve complex business disputes focusing primarily on issues arising among board members and shareholders in closely held companies, intellectual property and unfair competition litigation, and employment-related matters for both employers and employees.
