Stock Purchase Agreement Closely Held Corporation

The mother owned a significant share of the company`s shares at the time of her death in 2006. The son exercised his option to acquire his mother`s balances in good time, as provided for in the contract of sale. The son initially offered to pay $US 6,622 per share, based on calculations from the company`s audit firm. Subsequently, it turned out that the company made a mistake in the calculation, which brought its offer to 8,175 $US per share. The son used the same valuation method as when buying his father`s shares. The estate declined the offer, saying the fair market value was $US 28,251 per share. The estate argued that the son had benefited from inappropriate tax deductions for travel and hospitality expenses, board allowances and unprofitable leasing agreements. They argued that calculating fair value using „profit or loss as calculated for federal income tax purposes“ is unfair. The estate appealed and the Iowa Court of Appeals looked into the issue of market-appropriate market value and said that share purchase agreements are subject to the usual principles of contract law. The court agreed that the phrase „profit or loss, as determined for federal income tax purposes,“ had the potential for ambiguity. However, the court found the son`s interpretation more logical and binding.

The court held that „tax advice is an art rather than a science, and one can always discuss the adequacy of certain previous deductions.“ The court found that the interpretation of the succession was not manageable and did not offer an easy formula to establish. The purchase of shares in the father`s estate justified a prior transaction and the practical construction of the contract of sale was the fairest way to resolve the dispute here. The fundamental dispute that the court had to resolve was therefore whether the purchase price of the shares should be based on the actual tax return of previous years and not on a retroactive analysis of what should have been declared. During the hearing, the court decided that the parents simply intended to calculate the purchase price on the basis of the information available in the tax returns. The clear intention was to avoid such quarrels. This is how the son`s offer was approved. The son appealed and asked the court to order the estate to comply with the contract of sale. A supplement to the contract of sale provided the method for calculating fair value. The share transaction should be concluded at a time „mutually agreed upon by the parties and not exceeding 90 days after the date of exercise of this option“. The father died in 2000 and the son exercised his option and bought all of his father`s shares for $US 6,517 per share. . .

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