Legal Trickery – Eric A. Parzianello

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How The Employee You Terminated 20 Years Ago Can Still Be a Shareholder in Your Company

Posted by Eric Parzianello on July 16, 2014

Is it possible that the employee you terminated 20 years ago retains an ownership interest in your company?

In the recent case of Turner v. J&J Slavik Inc., a Michigan corporation’s former employee claimed that his shares in the company were not redeemed pursuant to the procedures in the parties’ stock restriction and redemption agreement when his employment terminated in January 1992.  He therefore contended that he holds the same ownership interest today.  The Michigan Court of Appeals agreed.

The agreement provided, in part, that: “[i]n the event the employment . . . of [plaintiff] . . . terminates, . . . [defendant] shall purchase, and [plaintiff] . . . shall sell, all of the shares of common stock in [defendant] then owned by such terminated employee.”  The purchase price was to be “the fair market value thereof as of . . . the last day of the month immediately preceding the termination of employment . . ..” “Fair market value” meant “the amount of [defendant’s] assets less the amount of its liabilities (book value) on the [v]aluation [d]ate divided by the number of shares outstanding . . . .”  However, no valuation occurred.  Instead, the company simply represented to the employee that the shares were worthless.  Additionally, despite the agreement’s deadline for the closing of the redemption of the stock, no such closing took place.

The Court found that the agreement contained no exemption from the valuation and closing procedure for allegedly worthless shares.  The Court ruled that because the redemption procedure was not followed, the employee’s stock was not canceled, and the employee did not lose his status as a shareholder.

Here, an employer’s prudence in having a well-drafted agreement with its employees was negated by the failure to follow its own procedures.

Eric Parzianello


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