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CalAttorney2
CalAttorney2, Attorney
Category: Business Law
Satisfied Customers: 10244
Experience:  I am a businesses law attorney, with experience advising and representing owners and investors.
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Im trying to buyout a member of my company but the amount

Customer Question

Hi, Im trying to buyout a member of my company but the amount of money he's asking doesn't make a lot of sense to me. Maybe you guys can help me to figure out how much I have to pay him according to our contract.
Here are some details of the contract:
2.1 The Members will contribute to the capital of the Company the money and/or property or services (“Capital Contributions”) specified in Exhibit B to this Agreement. It is the understanding of the Members that Investor #1 shall be responsible for any and all initial monetary Capital Contributions. It is acknowledged that Investor #1 shall make an Initial Capital Contribution of $500,000.00, as set forth in the Schedule of Capital Contributions attached hereto. If a Member fails to make the initial Capital Contributions specified in this Section by November 1st, 2015, that Member’s entire Membership Interest will terminate, and that Member will indemnify and hold the Company and the other Members harmless from any loss, cost, or expense, including reasonable attorney fees caused by the failure to make the initial Capital Contribution.
2.5 In exchange for his provision of services to the Company, Investor #2 is hereby issued a Vested Capital Interest, in the amount of Six (6.00%) Percent of the Current Value of the Company, as well as an additional Unvested Capital Interest, in the amount of Twenty Four (24.00%) Percent of the Value of the Company, which shall vest in the amount of One Half of One Percent (0.5%) per month for so long as Investo #2 remains a Member of the Company but for no more than Forty Eight (48) Months, until Investor #2’s total Vested Capital Interest equals a maximum of Thirty (30%) Percent. Upon execution of this Agreement, Investor #2 shall be issued a Profits Interest (in compliance with the terms for issuing such) of Twenty Four (24%) Percent, such that the combined Profits Interest and Vested Capital Interest of Investor #2 on the date of this Agreement is equal to Thirty (30%) Percent. Upon the vesting of any unvested Capital Interest belonging to Investor #2 there shall be a corresponding reduction in his additional Profits Interest, such that Investor #2’s combined Vested Capital Interest and additional Profits Interest is always equal to precisely Thirty (30%) Percent. As Investor #2’s Capital Interests vest, Imvestor #1’s Capital Interest shall be reduced in the same amount as Investor #2’s Capital Interest increases. The Capital and Profits Interests of the respective members is set forth in Exhibit B annexed hereto.
EXHIBIT B
MEMBERS; CAPITAL CONTRIBUTIONS; PROFITS INTERESTS
Name of Member. Initial Capital Contribution. Capital Account. Percentage of Interest in Company, LLC.
-Investor #2
-Services
-$30,000.00 USD (Value of Vested Capital Interest)
-6.00% Vested Capital Interest
24.00% Unvested Capital
30.00% Profits Interest
-Investor #1
-Cash
-$470,000.00 USD
-94.00% Capital Interest
70.00% of Profits
Submitted: 1 year ago.
Category: Business Law
Expert:  CalAttorney2 replied 1 year ago.
Dear Customer, Please keep in mind when trying to buy out a fellow shareholder that unless the other shareholder has defaulted (such as failing to make contributions by the Nov. 1, 2015 deadline in your membership agreement above), you do not have a legal right to force them to sell.This means that while you can value the respective shares or interests by doing various accountings ultimately the buy out price is going to be negotiated between the buyer and seller. (there are many ways to value investments, including value of current assets and liabilities, potential value of assets, "going concern value", or other valuations - buyers and sellers will selectively use a value to match their goals - obviously buyers will try to use a lower value - for example a lower "asset and liability" value, while a seller will try to use a higher "projected value" arguing that the company has a high chance of making a lot of money in the future).If there is a problem with the company and the investors can no longer work together it is possible to force a dissolution of the company in court - but this probably isn't what you are looking for (a dissolution action is very expensive and should only be used as a last resort, as it generally results in a termination of the company and greatly increases the transactional costs of dissolving the company).
Customer: replied 1 year ago.

Mr. William,

Thank you for the prompt reply. I should add that we have only been in business for 7mo. The only asset is an investment property that recently sold for roughly $190K. Investor #2 didn't contribute any financial capital and agreed on $30K sweat equity, which I understood as being based on 6% on a $500K value. This is where I'm confused. Investor #2 is demanding he should get over $40K.

Expert:  CalAttorney2 replied 1 year ago.
It appears that Investor #2 is driving a very hard bargain here. He does have a right to negotiate like this, you do not have to pay him as much as he is demanding, but ultimately the two of you will need to agree on a valuation.Keep in mind, in addition to the economics of valuation we discussed above, some buyers and sellers are simply looking at the fact that there is a "nuisance value" to the transaction (a seller sees that they can charge a premium because the buyer wants to get rid of them, and the buyer is willing to pay it).
Customer: replied 1 year ago.

To be fair, I believe he is being misguided and truly believes he is owed that much. I would agree if the full investment had come to fruition but given that only a partial investment was possible basing his share on a $500k valuation seems unfair. I'm just trying to educate myself so I can't bring it to his attention with a valid argument.

Expert:  CalAttorney2 replied 1 year ago.
Start by making sure you are both using the same method of valuing the business, or you are at least aware of how the other person is valuing the shares or interests.Without knowing how you have reached the competing values it is going to be very difficult to negotiate a more "mutually agreeable" resolution.
Customer: replied 1 year ago.

He is being advised by "our" business attorney, whom is handling all the paperwork. The attorney said investor#2 shouldn't be penalized for my inability to contribute the full agreed upon investment and is entitled to his $30K share plus the unvested capital interested for the months we were in business. I'm not finding any definite clause in the Operating Agreement covering this situation, only remotely similar clauses refer to the inability to fulfill the $500k investment and the "first right to refuse clause". I understand that he can ask for what he believes is fair, but can the argument be made that since the initial investment was not fulfilled everything should be adjusted based on the current available financial assets?

Expert:  CalAttorney2 replied 1 year ago.
You can make that argument, but keep in mind if you are not making the full contribution, you are going to be in breach of contract (not Investor #2), so this gives more leverage to them in this negotiation rather than the other way around.
Customer: replied 1 year ago.

He is in a dire financial situation and almost desperate to cash out. As it stands pretty soon I will signing paperwork agreeing to his terms, just to be done with it. I was just trying to figure if there was any legal basis for him to claim a set amount.

Expert:  CalAttorney2 replied 1 year ago.
No, the formal legal backdrop you are working against would be a "dissolution action" where the entire company is dissolved and each owner is paid out based on their share value. But if your company went that route you would literally have a court dispute between competing experts - your expert would be fighting an "asset minus liabilities" valuation while his expert would be arguing a "projected value" valuation. If the matter went to trial (instead of settling) a court would issue a judgment or ruling deciding what the valuation of the company is and what the distributions would be.It would be possible to argue that his contributions had not fully vested, but if his performance is being prevented by your actions (or other actions outside of his control) that would be a defense that he could raise to this.So there is a legal backdrop, but unfortunately it doesn't provide you with a neat or tidy answer to the matter.