Hartman v. Biginch Fabricators & Constr. Holding Co.

• Decision Date: 28 January 2021
• Docket Number: Supreme Court Case No. 20S-PL-618
• Citation: 161 N.E.3d 1218
• Parties: Blake B. HARTMAN, Appellant (Plaintiff) v. BIGINCH FABRICATORS & CONSTRUCTION HOLDING COMPANY, INC., Appellee (Defendant)
• Court: Indiana Supreme Court

161 N.E.3d 1218

Blake B. HARTMAN, Appellant (Plaintiff)

v.BIGINCH FABRICATORS & CONSTRUCTION HOLDING COMPANY, INC., Appellee (Defendant)

Supreme Court Case No. 20S-PL-618

Supreme Court of Indiana.

Argued: December 3, 2020

Filed January 28, 2021

ATTORNEY FOR APPELLANT: Mark J. Crandley, Barnes & Thornburg LLP, Indianapolis, Indiana

ATTORNEYS FOR APPELLEE: Louis F. Britton, Scott Craig, Cox, Zwerner, Gambill & Sullivan, LLP, Terre Haute, Indiana, Wayne C. Turner, Patrick A. Ziepolt, Hoover Hull Turner LLP, Indianapolis, Indiana

ATTORNEY FOR AMICUS CURIAE INDIANA LEGAL FOUNDATION: Anne L. Cowgur, Taft Stettinius & Hollister LLP, Indianapolis, Indiana

On Petition to Transfer from the Indiana Court of Appeals, No. 19A-PL-2263

Rush, Chief Justice.

The value of corporate shares may not correspond proportionally to the company's overall value. Shares are usually valued less if they represent a noncontrolling interest or if they are not publicly traded. When valuing such shares, an appraiser will often account for this reality by applying "minority" and "marketability" discounts.

Here, when tasked with valuing shares, an appraiser applied these discounts, even though the shares would be sold in a compulsory, closed-market sale. The selling shareholder takes issue with the valuation, arguing that minority and marketability discounts are open-market concepts inapplicable to the buyback provision of his shareholder agreement with the company.

While we recognize the public policy rationale underlying the shareholder's position, we hold that the parties’ freedom to contract may permit these discounts, even for shares in a closed-market transaction. And under the plain language of this shareholder agreement—which calls for the "appraised market value" of the shares—the discounts apply.

Facts and Procedural History

Blake Hartman is a former officer and director of BigInch Fabricators & Construction Holding Company, Inc., a closely held corporation. He also owns a minority portion of that company's shares.

In 2006, all BigInch shareholders, including Hartman, agreed to be bound by a contract that included a buyback clause. That clause requires BigInch to repurchase a shareholder's interest if the company involuntarily terminates the shareholder as an officer or director. And the clause further provides that the company must pay the former officer or director the shares’ "appraised market value" as determined by a third-party valuation company in accordance with generally accepted accounting principles.

In 2018, Hartman was terminated without cause, triggering BigInch's obligation to purchase Hartman's shares in the company. BigInch hired Wonch Valuation Advisors to appraise Hartman's interest. Applying a fair market value standard, the appraiser discounted the shares for their lack of marketability and Hartman's lack of control.

Hartman sued BigInch, asking, in part, for a declaratory judgment that the discounts are inapplicable because the shareholder agreement doesn't contemplate a fair market value standard. On cross-motions for summary judgment, the trial court ruled in BigInch's favor. The court interpreted the valuation term and found that "appraised" merely states how to determine "market value" and that "market value" and "fair market value" are synonymous terms, both consistent with the appraiser's approach. Hartman appealed; and the Court of Appeals reversed, concluding that the discounts could not apply to any closed-market sale. Hartman v. BigInch Fabricators & Constr. Holding Co., Inc. , 148 N.E.3d 1017, 1024 (Ind. Ct. App. 2020).

BigInch petitioned for transfer, which we granted, vacating the Court of Appeals opinion. Ind. Appellate Rule 58(A).

Standard of Review

We review summary judgment motions de novo, using the same standard the trial court applied. Hughley v. State , 15 N.E.3d 1000, 1003 (Ind. 2014). "[S]ummary judgment is appropriate ‘if the designated evidentiary matter shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.’ " Id. (quoting Williams v. Tharp , 914 N.E.2d 756, 761 (Ind. 2009) ). Here, the parties have stipulated that no genuine issues of material fact are in dispute, so we need only determine whether the trial court correctly applied the law.

Discussion and Decision

Indiana courts "firmly defend" parties’ freedom to contract by enforcing their chosen terms. Care Grp. Heart Hosp., LLC v. Sawyer , 93 N.E.3d 745, 749 (Ind. 2018). So, when construing an agreement, we focus on the words that the parties agreed to, giving clear and unambiguous language its ordinary meaning. Holiday Hosp. Franchising, Inc. v. AMCO Ins. Co. , 983 N.E.2d 574, 577 (Ind. 2013).

Hartman argues the minority and marketability discounts cannot apply to BigInch's buyback of his shares. He asserts it is a "settled rule" that the discounts are inapplicable to transactions that do not affect control of a company and that are not in the open market. BigInch contends that the "fatal flaw with Hartman's position" is that he asks for a "fundamentally different" valuation term than the one he agreed to in the shareholder agreement. We agree with BigInch.

We acknowledge caselaw that declines, on public policy grounds, to apply marketability and minority discounts to a closed-market sale of a noncontrolling business interest. See, e.g. , Wenzel v. Hopper & Galliher, P.C. , 779 N.E.2d 30, 38–39 (Ind. Ct. App. 2002), trans. denied. But those decisions do not govern because they do not concern a sale under a contract that expressly contemplates the shares’ "market value."

Upholding the parties’ freedom to choose their own valuation terms, we conclude that the discounts can apply to BigInch's buyback of Hartman's shares. The clause's plain and ordinary language anticipates a fair market valuation, and applying the discounts does not yield an absurd result. We thus affirm the trial court's grant of summary judgment for BigInch.

I. Freedom of contract principles govern our analysis.

We recognize parties’ freedom to enter into contracts; and we presume, when construing a contract, that its terms represent the parties’ freely bargained agreement. Haegert v. Univ. of Evansville , 977 N.E.2d 924, 937 (Ind. 2012). Thus, our analysis of the parties’ rights and responsibilities under a shareholder agreement—like the one governing the buyback of Hartman's shares—normally begins with that contract's language. See Sawyer , 93 N.E.3d at 749, 752.

But, here, we first address a threshold argument before turning to the agreement's terms. Hartman argues that, as a matter of law, minority and marketability discounts do not apply to shares sold to a controlling interest in a closed-market sale. He asserts that the discounts would "improperly punish minority shareholders and create a windfall for majority shareholders." And he contends that the Court of Appeals’ Wenzel opinion should govern our analysis of such a transaction. As explained below, we hold that such a blanket rule—one that disallows minority and marketability discounts in closed-market transactions, irrespective of an agreement's terms—is incompatible with basic contract-law principles.

In Wenzel , the Court of Appeals held that, as a matter of law, the trial court erred when discounting a minority shareholder's stock that was being purchased by the company in a compulsory buyout. 779 N.E.2d at 36–39. The panel reasoned that a minority discount is inappropriate in such a situation because "a sale to a majority shareholder or to the corporation simply consolidates or increases the interest of those already in control," which "would result in a windfall to the transferee." Id. at 39 (quoting Hansen v. 75 Ranch Co. , 288 Mont. 310, 957 P.2d 32, 41 (1998) ). And the panel further noted that, in such a sale, a marketability discount "ignores the fact" that there already was a ready-made market for the shares. Id.

But Wenzel is distinguishable because it concerned the interpretation not of a contract but of a statute. And when a statutory valuation term applies—not a contractual one—courts resort to the rules of statutory interpretation to discern the legislature's intent. Thus, the Wenzel panel applied those rules to construe the meaning of "fair value" under the Indiana Professional Corporations Act.

Id. at 35, 37–38. The Court of Appeals determined that the discounts did not apply because "fair value," within the Act's language, "carries with it the statutory purpose that shareholders be fairly compensated, which may or may not equate with the market's judgment about the stock's value." Id. at 38 (quoting HMO-W Inc., v. SSM Health Care Sys. , 234 Wis.2d 707, 611 N.W.2d 250, 255 n.5 (2000) ). Wenzel ’s rationale, then, doesn't control in this situation—one where the valuation term comes not from a statute but from a contract that contemplates the shares’ "appraised market value," not their "fair value."

We also observe that no court applying Indiana law has concluded these discounts are always inapplicable to a closed-market sale—only that the discounts cannot be applied in certain situations. For example, in Eyler v. Eyler , we determined that the trial court improperly applied a minority discount to a wife's share of stock in a family business during a marital asset division. 492 N.E.2d 1071, 1074 (Ind. 1986). But there, the wife jointly owned a majority of the business's shares with her husband; and we concluded that, under those specific facts, her shares should not be discounted. Id. And while the Southern District of Indiana has applied Wenzel ’s reasoning, it did so when interpreting an Indiana statute providing for dissenters’ rights. Stone v. Peoples Tr. & Sav. Bank , 363 F. Supp. 2d 1036, 1037–39 (S.D. Ind. 2005) (citing Ind. Code § 28-1-7.5-8(a) (2004) ). It did not conclude that the discounts could never apply to a closed-market sale. Id.

Cases Hartman cites from our sister states declining to apply the discounts are also...