Chancery Division Issues Ruling on Valuation of Limited Liability Companies Under the New Jersey Revised Uniform Limited Liability Company Act
One of the most difficult questions in New Jersey Business law concerning the retirement of a business owner is determining the value of the owner’s share of the business which the remaining owners must pay to buy out his share. This can be difficult even if the departure itself is on good terms. The method and amount of the valuation can cause vicious disputes even among friendly partners. The Chancery Division of the Superior Court of New Jersey in Bergen County recently issued a published decision on this problem in the context of a limited liability company.
In that case, Namerow v. Pediatricare Associates, LLC, four pediatricians were members (owners) of a medical practice named Pediatricare Associates, LLC. The Amended Operating Agreement which governed valuation of the business upon member retirements provided that:
The total value of the company (“company value”) shall be the last dated amount set forth on the Certificate of Agreed Value, attached hereto as Exhibit G and made part hereto, executed by the members. The members shall exercise their best efforts to meet not less than once per year for the purpose of considering a new value but their failure to meet or determine a value shall not invalidate the most recently executed Certificate of Agreed Value setting forth the company value then in effect. If the parties fail to agree on a revaluation as described above for more than two (2) years, the company value shall be equal to the last agreed upon value, adjusted to reflect the increase or decrease in the net worth of the company, including collectible accounts receivable, since the last agreed upon value. The value of a member’s interest (“Value”) shall mean the company value multiplied by the percentage interest held by said member and being purchased hereunder, less any indebtedness that the selling or disabled member, the Decedent, or a member departing for any other reason contemplated hereunder may have to the company or to the other members, whichever the case may be.
The Amended Operating Agreement also required that a vote of eighty percent of the ownership interests was required to amend the Agreement. Here, in an LLC with four equal members, that would have required a unanimous volte. No vote was ever taken.
The members had not agreed to a revaluation in more than two years. One member, David M. Namerow, M.D., decided to retire; he was the first member to retire. The parties could not agree on the fair market valuation of the limited liability company. The other members therefore insisted that the valuation be done in accordance with the Amended Operating Agreement. Dr. Namerow, however, insisted that the members had not operated under Amended Operating Agreement. In 2009, they had obtained a fair market valuation to assist their financial planning and in March of 2016 to assist in succession planning. They also obtained a fair market valuation in October of 2016 to help in negotiating an agreed upon buyout price. However, they never agreed. Dr. Namerow’s attorneys argued that this course of conduct should override the terms of the Amended Operating Agreement.
The chancery judge rejected this argument. The judge explained that there must be a “mutual and clear intention” by all parties to modify or amend the Amended Operating Agreement. Here, there was no evidence at all that any of the other members had intended to waive their rights under the Amended Operating Agreement, and the fact that they tried to resolve the matter amicably does not change that.
Moreover, the judge explained that the language in the Amended Operating Agreement was clear and unambiguous, and the law does not allow judges to rewrite clear and unambiguous contracts to benefit one party at the expense of the others.
Every form of business entity allows for the owners to create an agreement which will govern the operation of the business and the relations among its owners – partnerships have partnership agreements; corporations have shareholder agreements; and limited liability companies have operating agreements. In the absence of a governing agreement the specific laws themselves, in this case the New Jersey Revised Uniform Limited Liability Company Act, will govern.
Therefore, the first key takeaway is that there should be a governing agreement, such as an LLC operating agreement. This allows the owners to take their destiny into their own hands. It can also go a long way toward preventing disagreements, and establishing procedures to resolve disputes if they do occur. This is invaluable. It also prevents the owners from being hostage to the vagaries of the law.
The second key takeaway is that what these governing agreements actually say is extremely important. The agreement will govern the owners’ destinies. It is therefore intensely important that these agreements be well-drafted, that the owners know what the agreements say, and that they say what the owners intend.
Our New Jersey business lawyers represent businesses and their owners. We draft LLC operating agreements, corporate shareholders agreements and partnership agreements, so that the owners can operate their businesses harmoniously and make money. However, when disputes do arise, we are experienced litigators who can represent owners for breach of the governing agreement, minority shareholder oppression (or oppression of partners or LLC members), breach of contract, and other issues.
Call (973) 890-0004 or fill out the contact form on this page to set up a consultaiotn with one of our New Jersey business attorneys. We can help.