Stock Purchase Agreement Closely Held Corporation

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The estate appealed and the Iowa Court of Appeals dealt with the issue of fair value, where the stock purchase contracts are subject to the usual principles of contract law. The court accepted that the term “benefit or loss, as determined by federal income tax” has the potential for ambiguity. However, the court found the interpretation of the son more logical and binding. The court stated that “tax advice is more of an art than a science, and one can always discuss the adequacy of certain past deductions.” The Tribunal found that the interpretation of the estate was cumbersome and not an easily identifiable formula. The acquisition of shares in the father`s estate and the practical construction of the sales contract were the fairest way to settle the dispute. The case is an important point for practitioners who design the buy-sell language for tight corporate shares: add a language that requires the company to distribute enough revenue to cover the tax debt until the value of the stock is determined and the shares are actually purchased by the agreement. Lee v. Meloan, 0-286/09-1328 (Iowa Ct. App., June 30, 2010). A well-developed share purchase agreement not only protects the seller and purchaser of shares, but also ensures that the company complies with securities rules. It should be a transparent case.

Full disclosure (with full access to transaction and corporate financial data) is the key to compliance with securities rules. It is, of course, to ensure that the buyer is fully informed of the risk associated with the investment. The share purchase agreement also sets the price per share, the number of shares whose shares are sold, the class of shares sold, the effective date of the transfer and other terms of sale. The share purchase agreement should clearly define the rights and obligations of each party in the future. In this case, it is a buy-sell agreement for a family company that owns the Iowa S-Corporation. The agreement provided that the son, who took over the family business, would acquire all outstanding common shares after the death of his parents. If the son exercised the option, the scammer`s personal representative would be required to sell the scammer`s shares at the price set by the agreement. The agreement stated that the purchase price should be the “fair market value” of the shares. An endorsement of the sales contract provided the method of calculating fair value.