Shareholder Agreement Language Causes Problems
Ehlinger v. Hauser is a long one. It’s about a dispute between two joint and equal shareholders in a moulding company. First, I’ll ask the obvious question: doesn’t anyone ever learn that equal partnerships, including equal shareholders, just doesn’t work? Second, this going in halvsies on businesses is only good for us lawyers. If any non-lawyers are reading this, and you remember only one thing, remember that you never want to be in a stand-off with your business partner who owns the exact same amount of the business that you do.
Okay, now on to the case itself. The language of the shareholder agreement was at issue — if you’re going to be joint and equal, you better have a VERY tightly drafted agreement. This case proves it. Here’s the holding in a nutshell, because the full version will take a while:
Hauser contends that both the circuit court and court of appeals incorrectly concluded that the buyout agreement is unenforceable. First, he asserts that the circuit court erred when it determined that the undefined term “book value” rendered the buyout agreement unenforceable. Second, Hauser argues that the court of appeals incorrectly determined that supporting documentation is a necessary component of a computation under generally accepted accounting practices (“GAAP”). Third, he asserts that the circuit court erroneously exercised its discretion when it denied him further opportunity to challenge and counter the special magistrate’s conclusions. He argues that the meaning of “book value” is ambiguous and that he is entitled to a trial to determine the intent of the parties.
We conclude that the circuit court did not err when it determined that the agreement was unenforceable. Both parties agree that Ehlinger is entitled to examine Evald’s books to determine whether they accurately reflect the corporation’s assets and liabilities, a task that the special magistrate was unable to perform due to the state of Evald’s records. Accordingly, we need not resolve whether the contract is indefinite or ambiguous here because under these circumstances, it cannot be enforced.
Additionally, to the extent that Hauser’s characterization of the court of appeals’ decision is accurate, we determine that his argument about the scope of GAAP fails. The question is not what is required under GAAP, but what is required to determine the parties’ rights.
Finally, we conclude that the circuit court did not erroneously exercise its discretion when it denied Hauser the opportunity to subject the special magistrate to a broader scope of cross-examination, to depose the special magistrate, and to present his own expert witness in rebuttal.
In his cross-petition, Ehlinger argues that the circuit court erroneously permitted the defendants’ litigation expenses to be paid by the corporation. This decision would not be erroneous if Hauser was entitled to indemnification or if Evald spent its assets in its own defense. We determine that Hauser was not entitled to indemnification by Evald according to the provisions of Wis. Stat. § 180.0855 (2007-08). Further, under these facts, the litigation expenses were not incurred by the corporation for its own defense. Therefore, we conclude that the circuit court erroneously exercised its discretion when it permitted the corporation to pay Hauser’s litigation expenses.
This case is a lesson that what seems right or just is not always what’s legal, and once again, don’t go in equal shares on a business. The procedural history is convoluted, but the legal issues are fascinating, at least for those of us who deal in shareholder and business disputes. The discussions in this case should set the standard for considerations of shareholder agreements and liquidation valuation for a few years to come. If you’re writing or negotiating a business start-up, read this case now.
