Valuation of Shares at the time of separation.

[spidrr019]

NY

My wife and I separated in Oct. 2018.

At the time I had Class B Common Non-voting shares in the privately held company that I worked for 100,00 shares (5% holdings).

In 2022 I was let go due to breach of the shareholders agreement and the company bought back the shares at a nominal value (was paid $0.50 total).

My wife and get lawyer will likely argue that in that in 2018 the shares had value -

I'm wondering how valid my argument (to follow) would be and how a judge might respond to it:

I would argue - in accordance with the shareholders' agreement, the value of the shares was contingent upon the worst-case scenario outlined in the agreement. As the agreement explicitly allowed the company to buy back shares at a nominal value if a breach occurred, and such a breach did happen, the actual value of the shares aligned with this predetermined scenario.

The foreseeability of this risk was inherent in the known terms of the agreement, and the subsequent buyback was not an unforeseen event but rather a contractual consequence.

In other words - the hopes and dreams was that these shares at the time of separation would be worth something but, they could also be worth nothing if the contract was breached - which it was later on although the "later on" part is irrelevant -- my main argument is that the value of the shares was contingent upon the worst case scenario (breach of contract).

Thanks.

 

[LdiJ]

NY

My wife and I separated in Oct. 2018.

At the time I had Class B Common Non-voting shares in the privately held company that I worked for 100,00 shares (5% holdings).

In 2022 I was let go due to breach of the shareholders agreement and the company bought back the shares at a nominal value (was paid $0.50 total).

My wife and get lawyer will likely argue that in that in 2018 the shares had value -

I'm wondering how valid my argument (to follow) would be and how a judge might respond to it:

I would argue - in accordance with the shareholders' agreement, the value of the shares was contingent upon the worst-case scenario outlined in the agreement. As the agreement explicitly allowed the company to buy back shares at a nominal value if a breach occurred, and such a breach did happen, the actual value of the shares aligned with this predetermined scenario.

The foreseeability of this risk was inherent in the known terms of the agreement, and the subsequent buyback was not an unforeseen event but rather a contractual consequence.

In other words - the hopes and dreams was that these shares at the time of separation would be worth something but, they could also be worth nothing if the contract was breached - which it was later on although the "later on" part is irrelevant -- my main argument is that the value of the shares was contingent upon the worst case scenario (breach of contract).

Thanks.

First, drop the rhetoric and use plain language. It will serve you better in court. Your argument is a valid one assuming that you did not do something nefarious to cause the asset to have no value. There are some people who have been known, in divorce situations, to deliberately tank their own financial lives in order to make sure that their ex gets nothing of value. I know that it seems crazy, but it happens. Sometimes too they don't necessarily do the things on purpose, but their actions are still not reasonable.

In that scenario a judge would have the option of awarding your spouse a greater portion of other assets, to make up for the asset you lost. So yes, you have a reasonable argument, but that argument can be overcome based on the specific facts of the matter.

 

[Bali Hai Again]

NY

My wife and I separated in Oct. 2018.

At the time I had Class B Common Non-voting shares in the privately held company that I worked for 100,00 shares (5% holdings).

In 2022 I was let go due to breach of the shareholders agreement and the company bought back the shares at a nominal value (was paid $0.50 total).

My wife and get lawyer will likely argue that in that in 2018 the shares had value -

I'm wondering how valid my argument (to follow) would be and how a judge might respond to it:

I would argue - in accordance with the shareholders' agreement, the value of the shares was contingent upon the worst-case scenario outlined in the agreement. As the agreement explicitly allowed the company to buy back shares at a nominal value if a breach occurred, and such a breach did happen, the actual value of the shares aligned with this predetermined scenario.

The foreseeability of this risk was inherent in the known terms of the agreement, and the subsequent buyback was not an unforeseen event but rather a contractual consequence.

In other words - the hopes and dreams was that these shares at the time of separation would be worth something but, they could also be worth nothing if the contract was breached - which it was later on although the "later on" part is irrelevant -- my main argument is that the value of the shares was contingent upon the worst case scenario (breach of contract).

Thanks.

What does your separation agreement (if any) say about this? What is the date of commencement of the divorce action (if any)? Does your wife have an attorney currently or will she “get” one?

Any time shares are involved whether in your case, retirement account or other, you should be insisting on splitting the shares and not the dollar amount for obvious reasons.

Do you have an attorney? If not, it’s time to get one.

 

[adjusterjack]

my main argument is that the value of the shares was contingent upon the worst case scenario (breach of contract).

Simple English is our friend.

With whom are you having this argument? Your wife or the business.

If your wife (as I suspect) what is your position? That the shares were worth 50 cents and she should get 25 cents?

What is her position? That the shares were worth a lot more money and she wants more money than you want to give her?

See how easy it is to express yourself without the rhetoric.

 

[zddoodah]

My wife and I separated in Oct. 2018.

Is there a separation agreement? Has either of you filed for divorce yet? If so, when did that happen?

In 2022 I was let go due to breach of the shareholders agreement and the company bought back the shares at a nominal value (was paid $0.50 total).

A breach of the shareholders' agreement by whom? Please provide a sentence or two that explains the factual circumstances that led to your termination.

My wife and get lawyer will likely argue that in that in 2018 the shares had value

Putting aside the presumed typo here, so what? In other words, why does it matter if the shares had any particular value in 2018? The fact is that, in 2020, you were paid $0.50 x whatever "100,00 shares" means (can't tell if that's 10,000 shares or 100,000 shares). Do you still have the $5,000 or $50,000 you received from the buyout?

I'm wondering how valid my argument (to follow) would be and how a judge might respond to it

Depends on what the shareholders' agreement and any separation agreement say.

I would argue - in accordance with the shareholders' agreement, the value of the shares was contingent upon the worst-case scenario outlined in the agreement. As the agreement explicitly allowed the company to buy back shares at a nominal value if a breach occurred, and such a breach did happen, the actual value of the shares aligned with this predetermined scenario.

Despite knowing nothing about your shareholders' agreement or any separation agreement, this argument makes no sense. The valuation of shares in a non-publicly traded situation can be extremely difficult to figure - primarily because there is no market for such shares. Stated differently, the value is whatever an arm's-length buyer would be willing to pay for them. I'm at a loss to understand why a hypothetical future breach of the agreement might impact current value.

The bottom line, of course, is that, if you don't have a lawyer, you should hire one.

 

[Taxing Matters]

In other words - the hopes and dreams was that these shares at the time of separation would be worth something but, they could also be worth nothing if the contract was breached - which it was later on although the "later on" part is irrelevant -- my main argument is that the value of the shares was contingent upon the worst case scenario (breach of contract).

Thanks.

If the separation/divorce agreement specifies she should have gotten the shares (or its equivalent value) in 2018 then the valuation is 2018 is what matters, and from your post it appears that you believe that to be the case. The problem with your theory above is that you are applying hindsight, which is always 20/20, as the saying goes. But in 2018 there was likely no fact present indicating a breach was imminent. Stock and similar interests are not valued using the worst possible outcome. If they were, all stocks would trade at or near $0. There is always the possibility of even a huge company suddenly and unexpectedly crashing. Stocks are instead typically valued based on either liquidation value (i.e. what you would have received if the company dissolved, paid off its creditors, and then distributed was left to the shareholders in 2018) or by computing the net present value of projected earnings. Depending on the exact nature of the company there are some less common methods that may be more appropriate. But none them uses a method of what the stock would be worth given the worst outcome possible when the are no indications at the time that the worst is coming. I understand why you'd want the current nearly worthless value of the stock to be the valuation for purposes of the separation/divorce agreement because you don't want to cough up out of other assets what she would be due.

IMO uour first step here is to talk to your attorney (if you had one) that represented you when the agreement was made, or if you didn't have one then, find a family attorney instead. Have the attorney read over the exact language used in the agreement and give you his/her opinion of what it requires you to do. This is important because you don't want to litigate over this issue and pay the attorney's fees for that if you are likely to lose and also have to give her the value of the shares in 2018 as determined by a business appraiser. If it's the 2018 value that you owe her, getting at least a preliminary valuation done will give you an idea of what you may be looking at if it goes to court, and use that as your frame of reference in negotiation with the ex over what the ex will receive.

 

[spidrr019]

Thank you all for your responses.

Just adding some clarity from the original post.

Our separation date is October 23, 2018.

In 2022, the company bought back the shares (100,000 common class B Non-voting shares which is 5%of the company) for which they paid me $0.50.

The reason for the buyback is because I was let go, in breach of employment and shareholder agreement contracts.

This was a legitimate termination and not a "nefarious" tactic to better my position with regards to the divorce.

Losing these shares hurt me as much, if not more than it would hurt her. It was not intentional, rather, a large, expensive mistake on my part.

We've had a separation agreement in place since 2018 for visitation, child support, vacations with children, holidays etc. Everything other than the matter of the shares.

In 2018, the company had a valuation done by a CPA.

The CPA determined the value of the shares at the time of separation to be worth $40,000.

A short while after the separation, we thought reconciliation could be possible.

During the time that we tried to reconcile, we weren't "together" in the legal sense and thus we continued to honor what we had already outlined in the separation agreement - however, the discussion around the shares was mute during that time. Neither she nor I brought it up.

Ultimately, almost 6 years later - as of a few days ago we decided divorce would be the next step as reconciliation wasn't possible.

She brought up the shares - she spoke to a lawyer recently who said that the valuation at the time of separation (done by the CPA) is not a credible valuation as it needed to be done by a Certified Business Valuator. She's right about this.

Here's where it gets tricky.

I sent a message to the owner of the business in which I had shares, stating that it's likely that a re-evaluation of the shares at the time of separation may be needed.

The owner of the company called me a day later.

Keep in mind, this is no longer a small business as it was in 2018. It generates roughly $40-60 million in revenue a year and is highly profitable.

I know for a fact the company has retainers with exceptional law firms - globally.

The point being - I have to (and to anyone reading this) should believe that what he expressed to me is in good faith, not misleading and while I'm sure companies do nefarious activity all the time - please understand and accept when I say that this particular owner (whom I've known long before his business was started), this company, operates with the utmost integrity within the law.

They would not do anything to put the company in jepaordy or any legal trouble nor would be so any favours for anyone that would be morally, ethically or legally wrong.

Here's what he communicated to me (most of it was in my original post).

He suggested to me that I retain a lawyer (which of course I will be doing) and to present the following:

The argument is that the shares effectively weren't worth anything.

As per the shareholders agreement, they weren't worth any more than the worst case scenario. The worst case scenario would be a breach of contract and a buyback of the shares at whatever nominal value the company deems they are worth.

As I noted earlier, the company bought back the shares for $0.50 in 2022 at a time when the company is likely worth millions of dollars. This means, the shareholder agreement undoubtedly has a clause that states that if a breach occurs, the company can buy back at a nominal value.

So while the valuation done in 2018 determined a value of $40,000 dollars, it's also likely true that the shares could be worth nothing in a worst case scenario.

In fact, the worst case scenario is indeed what played out in 2022 when the shares were bought back for a nominal value of $0.50.

Now, of course - what happened in 2022 has no effect on the value of the shares in 2018 - however my question to you all is this:

Could a legitimate argument be made - that while the value of the shares could be worth $40,000 at the time of separation, it could equally be true, that the shares didn't have any value at all above the worst case scenario - even if the worst case scenario didn't occur at the time of separation.

He further commented that in a legal proceeding, a judge will likely not accept a $0 dollar value, however, there may be an instance where a middle ground may be found based on the argument above - if indeed the argument holds any merit.

 

[spidrr019]

If the separation/divorce agreement specifies she should have gotten the shares (or its equivalent value) in 2018 then the valuation is 2018 is what matters, and from your post it appears that you believe that to be the case. The problem with your theory above is that you are applying hindsight, which is always 20/20, as the saying goes. But in 2018 there was likely no fact present indicating a breach was imminent. Stock and similar interests are not valued using the worst possible outcome. If they were, all stocks would trade at or near $0. There is always the possibility of even a huge company suddenly and unexpectedly crashing. Stocks are instead typically valued based on either liquidation value (i.e. what you would have received if the company dissolved, paid off its creditors, and then distributed was left to the shareholders in 2018) or by computing the net present value of projected earnings. Depending on the exact nature of the company there are some less common methods that may be more appropriate. But none them uses a method of what the stock would be worth given the worst outcome possible when the are no indications at the time that the worst is coming. I understand why you'd want the current nearly worthless value of the stock to be the valuation for purposes of the separation/divorce agreement because you don't want to cough up out of other assets what she would be due.

IMO uour first step here is to talk to your attorney (if you had one) that represented you when the agreement was made, or if you didn't have one then, find a family attorney instead. Have the attorney read over the exact language used in the agreement and give you his/her opinion of what it requires you to do. This is important because you don't want to litigate over this issue and pay the attorney's fees for that if you are likely to lose and also have to give her the value of the shares in 2018 as determined by a business appraiser. If it's the 2018 value that you owe her, getting at least a preliminary valuation done will give you an idea of what you may be looking at if it goes to court, and use that as your frame of reference in negotiation with the ex over what the ex will receive.

I just read this reply after my latest post - and I think I agree.

My only question would be - in 2022, when the breach occurred how could the buyback of the shares be only worth $0.50 when the company was exponentially more profitable in 2022 than it was in 2018.

This leads me to believe that there is indeed a clause in the contract that states the company can buy back the shares at a value exponentially less than its free market value.

If that is the case - my question to you would be, could the argument still hold merit that the value of the shares in 2018 could be whatever nominal value the company deems appropriate?

Or - is that not valid at all, due to the fact that a breach of contract is what determines a lesser valuation of the shares and thus since there was no breach in 2018, the value of a private entity has to be determined by the free market value?

Further - does the company itself not determine what value it would sell its shares for? At arms length, a private company could accept an offer of $100 for the company or $1,000,000. No?

 

[LdiJ]

You definitely need an attorney. You have a situation here where they took your property for basically nothing and you didn't even fight it. Normally that would make it look like you did something so seriously wrong that you had no chance of fighting it. However, you also appear to be able to communicate with the current owners of the company and that they are willing to help you, so just what could you have done that was so horrible?

It smells. I am not saying that you are up to anything, but the circumstances make it look like you could be. Particularly since you lost your job right around the time that divorce became truly imminent. If I were in your shoes I would have possibly hired an attorney to fight for a fair price on the shares rather than be looking for advice as to how not to pay out money for them in a divorce...at least at this point.

You don't have to try to convince me one way or another. You do need to consult a local attorney who can review everything, including the shareholder agreement.

 

[spidrr019]

You definitely need an attorney. You have a situation here where they took your property for basically nothing and you didn't even fight it. Normally that would make it look like you did something so seriously wrong that you had no chance of fighting it. However, you also appear to be able to communicate with the current owners of the company and that they are willing to help you, so just what could you have done that was so horrible?

It smells. I am not saying that you are up to anything, but the circumstances make it look like you could be. Particularly since you lost your job right around the time that divorce became truly imminent. If I were in your shoes I would have possibly hired an attorney to fight for a fair price on the shares rather than be looking for advice as to how not to pay out money for them in a divorce...at least at this point.

You don't have to try to convince me one way or another. You do need to consult a local attorney who can review everything, including the shareholder agreement.

LdiJ - this is precisely true.

The circumstances surrounding my termination was indeed egregious enough for the company to have merit in buying back the shares. Without going into much detail on this forum, the part about the $0.50 buyback cannot, could not and was not argued.

I'm not looking to defend the buyback of the shares at the nominal $0.50 value. I have no grounds on that argument. The company was within its right to buyback the shares at that value.

Truth be told, I don't even mind paying my wife the valuation at the time of separation if that's what the courts decide.

I'm simply trying to see if there is merit in the argument that the value of the shares at the time of separation could have been worth $40,000 or is it equally true that they held no value at all above the worst case scenario - while the worst case scenario played out in 2022 (rightfully, legally and with merit), the principle would be that the shares could be worth $40,000 in 2018 or they could be worth nothing above the worst case scenario - at any given time.

In other words - in viewing the 100,000 class B shares. Regardless if a breach occurred and when, if at any point the shares could be bought back for a nominal value determined by the company - did they really hold any true value at all?

I'm wondering if there's an iota of gray area here.

To your comment about the smell of it - I can completely understand your sentiment. However, what I'm stating on this forum is what I'd state as matter of truth to any attorney that I will ultimately and inevitably hire. I'm still trying to negotiate a settlement and come to terms with my wife outside of court / lawyers - while simultaneously preparing to hire a lawyer when needed (most likely the case).

I just thought I'd propose this unique circumstance to the forums to see what others thought of the situation.

 

[Bali Hai Again]

I’m guessing that the shares were worth 40k in 2018 but your argument that they “could have been worth zero” won’t get far in divorce court. Your soon ex-wife may claim that her 20k share PLUS earnings would have been worth much more if not for your admitted colossal blunder that caused the loss of this asset.

 

[spidrr019]

I’m guessing that the shares were worth 40k in 2018 but your argument that they “could have been worth zero” won’t get far in divorce court. Your soon ex-wife may claim that her 20k share PLUS earnings would have been worth much more if not for your admitted colossal blunder that caused the loss of this asset.

The collosal blunder occurred in 2022.

She has no claim of what they could have been worth after the date of separation.

If anything, she has claim to a proper valuation at the time of separation in 2018. Anything after that is irrelevant.

 

[Zigner]

So, it sounds like you acknowledge that you owe her *at least* $20,000

 

[spidrr019]

So, it sounds like you acknowledge that you owe her *at least* $20,000

Sure. I mean, this is beyond the point of my original post and the purpose of this thread.

The point, for those who missed it - is whether or not there is a reasonable argument to be made that because the shares could be bought back at any point at a nominal value deemed by the company - regardless of the circumstances of the buyback - the principle is that they could be bought back at any point and would that beg the question of whether or not they held any real value at all?

I'm not suggesting this is to be true. I'm asking a question and your alls opinion.

Further - I guess another question I have is whether or not a CBV deems the value of the company shares to be $40,000.

Ultimately is it not on the company to determine what price they are willing to sell the shares for? How does a court determine which value to honor?

 

[Zigner]

You have a valuation that was done at the time of separation.
There's nothing that arguing here will help. Speak to an attorney.