The Michigan C
ourt of Appeals reversed the trial court’s decision in Turner v. J&J Slavik, Inc., and found that an employee-shareholder still held the same ownership interest in the corporation now that he owned prior to his termination in 1992, where the corporation failed to follow its own stock redemption process.
The employee-shareholder first brought a lawsuit against the corporation in 2004 and since then has endured a decade of litigation. Over that time, the case went to the Michigan Court of Appeals four times on various issues in the case before this final victory. Mark Demorest, attorney for the employee-shareholder, stated “Sometimes it takes a while, but justice eventually prevailed”.
Stock restriction and redemption agreements allow corporations to repurchase shares of stock when an employee is terminated. This type of agreement is popular for closely held corporations that want to control who its shareholders are. However, where a procedure is outlined for the repurchasing of the stock, it must be followed to ensure protection and fairness to both the employer and the employee.
In Turner v. J&J Slavik, the procedure outlined by the corporation’s stock restriction and redemption agreement required a valuation of the stock be done so that the fair market value could be determined, and also required a closing to take place. However, instead of following the procedure outlined in the stock restriction and redemption agreement, the corporation instead sent a letter to the employee after his termination declaring that the corporation was in a “substantial deficit position.” If this was true, the corporation would not have been able to pay anything for the employee’s shares. However, an employee shareholder should not have to rely on the corporation’s decision that his/her stock is worthless where a procedure is outlined requiring a neutral party to appraise the value of the stock. In fact, the Court of Appeals in this case found the resulting unfairness to the employee inexcusable, noting that “[t]he lack of transparency resulting from defendant’s failure to follow these processes meant that the only information available to plaintiff concerning defendant’s financial position was its vague and self-serving May 21, 1992 letter. . .”
In addition, the Court rejected the defendant corporation’s argument that the shares were automatically transferred upon the employee’s termination and therefore, the employee immediately ceased to be a shareholder upon termination. Instead, the Court recognized that the employee was required to sell his shares upon termination, but the corporation failed to take the steps necessary to purchase the shares. Furthermore, the corporation continued to identify the employee as a shareholder in other corporation documents for several years after his discharge. Therefore, the Court of Appeals found that the former employee remained a shareholder over 20 years after his termination.
On April 18th, Michigan Lawyers Weekly featured an article on the Court of Appeals decision titled “Stock redemption flubbed ex-employee still a shareholder”. The article can be accessed at the link below (however, payment to access the article is required for non-subscribers):
http://milawyersweekly.com/news/2014/04/18/stock-redemption-flubbed-ex-employee-still-a-shareholder/
If you own a corporation or are a corporate employee and have concerns about a buy-sell agreement, stock repurchase and redemption agreement, or any other questions, please contact the attorneys at Demorest Law Firm.
