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Dealing With the Dissolution of a Business Partnership

Dealing With the Dissolution of a Business Partnership

Divorces are often bitter affairs that can drag out for years in court. The same is true for many business divorces. When a partnership or joint venture ends there can be civil litigation that takes years to resolve.

Company Sales Price Not the Same Thing as “Enterprise Value”

For example, a Manhattan appeals court recently weighed in on a nasty split between two former partners over the sale of their company. The plaintiff and the defendant were Army veterans who were 50/50 partners in a defense contracting firm. At the height of U.S. military operations in Iraq and Afghanistan, the partners' company made millions of dollars providing logistical services.

By 2009, personal animosity between the partners led to efforts to sell the company. When they were unable to locate a buyer right away, the defendant agreed to buy out the plaintiff's 50% share. The parties negotiated a stock purchase agreement that contained a “windfall clause.” This clause stated that if the defendant turned around and sold the company within one year “for a purchase price exceeding an enterprise value of $65 million,” than the plaintiff was entitled to 20% of the “sales proceeds.”

Less than two weeks after buying out his partner, the defendant began talks to sell the company to a private equity firm. The sale included $60.7 million in cash and equity in the acquiring company that, on paper, was valued at $3.8 million. This made the entire purchase price $64.5 million, $500,000 short of the amount necessary to trigger the windfall clause.

The plaintiff was understandably dissatisfied with this and sued the defendant. The case was tried before a federal judge in Manhattan without a jury. In December 2014, the judge ruled in favor of the plaintiff. The defendant appealed, but the U.S. Second Circuit Court of Appeals affirmed the judge's decision.

The key to the case was the meaning of “enterprise value” in the windfall clause. The defendant argued this was the same thing as the sales price, which was $64.5 million. But as the Second Circuit pointed out, it makes no sense that a contract between the two partners would allow one partner to make a unilateral “and possibly arbitrary” of the company. After all, the plaintiff was not a party to the sales contract between the defendant and the buyer. While the sales price might equal “enterprise value” in a cash-only deal, where, as here, there is equity involved, the price “stated in the deal documents need not and may very well not reflect the true value” of the shares.

The trial judge calculated the actual enterprise value of the company at $81 million. The Second Circuit upheld this calculation. This meant the defendant had to pay the plaintiff 20% of that amount, or just over $16.3 million.

Get Help from a New York Civil Litigation Attorney

Words matter in a business contract. This is why anytime you plan to start (or end) a business relationship, it is a good idea to consult with an experienced Long Island business attorney. Contact the offices of Nisar & Mason, P.C. if you have any questions or concerns.
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