How "Buy-Sell" Clauses Can Help End Your Business Relationships

Many business agreements contain a “buy-sell” clause. This represents an agreement between the owners of a business on how to deal with the departure of one or more co-owners. A common buy-sell provision might require the remaining co-owner to purchase the departing co-owner's share of the business within a fixed time period.

Cole v. Macklowe

To illustrate how buy-sell provisions work in practice, consider a recentdecision by the Appellate Division, First Department. This case revolved around a limited partnership created to develop an office tower in Manhattan. The developer, acting through his management company, hired the plaintiff to serve as his “right-hand-man” on the project. The plaintiff then signed an a partnership agreement with the defendant giving him a 9% interest rate as a limited partner.

The limited partnership agreement contained a buy-sell clause. If the defendant's employment with the management company ended for any reason, the plaintiff was required to buy out the defendant's 9% interest at the fair market value. Additionally, if the office tower was sold at any point during the partnership's existence, the defendant had 90 days to pay the plaintiff his share of the proceeds.

The plaintiff resigned from the management company in 1999. The defendant failed to exercise his right, under the buy-sell provision, to buy back the plaintiff's 9% share. The office was tower was eventually sold in 2008, with the limited partnership receiving over $230 million. The defendant then failed to pay the plaintiff his 9% share, which led to extended litigation.

The First Department first addressed this case in 2012. The appeals court rejected the defendant's motion to dismiss the case. The defendant argued the plaintiff forfeited his interest in the partnership when he failed to sell it back to the defendant. The First Department said that was “absurd” and “contrary to basic contract law.” The whole point of the buy-sell provision was to mandate the plaintiff receive market value for his share—the defendant could not simply “acquire plaintiff's partnership interest absent the consideration expressed in the agreement.”

In its most recent decision, issued on December 23, 2014, the First Department went on to hold the plaintiff was entitled to summary judgment on the underlying breach of contract claims. The breach was not in the defendant's failure to buy back the 9% when the plaintiff quit, but rather when the defendant failed to give the plaintiff 9% of the proceeds from the 2008 sale. The defendant again argued the plaintiff had somehow forfeited his rights by failing to act under the original buy-sell provision. But as the First Department explained, the contract “imposed no affirmative duty” on the plaintiff; the buy-sell provision only required the defendant to act.

Avoiding Unnecessary Litigation

Hopefully, a well-drafted buy-sell clause can help avoid the type of litigation described above. The whole point of such provisions is to ensure an amicable separation of business partners if and when circumstances warrant. If you need advice from a qualified New York business attorney on buy-sell clauses or any other contract matter,contact our office today.