In 1971 Johnny Warren, Mrs. Nelson's father, cofounded Compressor Systems, Inc. (CSI), with another family. CSI sells and rents gas compression equipment to the oil and gas industry and provides financing and maintenance services in connection with that equipment.3 In 1975 Mr. Warren and his brother-in-law purchased the other family's portion of CSI, after which the company was solely owned by the Warren family. In 1985 Mr. Warren purchased the assets of a Caterpillar dealer operating in Abilene and Odessa, Texas, and Caterpillar approved him as the principal dealer for that territory. Throughout the 1990s and 2000s Mr. Warren continued to expand his family businesses, many of which focus on the oil and gas industries and operate throughout the Southwest United States, the Rocky Mountains, and internationally in South America and Mexico.
As part of this expansion, on September 26, 1990, Warren Equipment Co. (WEC) was organized as a Delaware corporation. WEC is a holding company that owns 100% of each of its seven operating subsidiaries, including CSI.
B. Operating Subsidiaries The largest of WEC's subsidiaries is Warren Power & Machinery, L.P., which does business as Warren Cat. It accounts for approximately 51% of WEC's value. Warren Cat is the exclusive dealer for Caterpillar engines and earth-moving equipment and machinery in its territory, which includes almost all of Oklahoma and a large area in West Texas. Warren Cat was required to enter into a sales and service agreement with Caterpillar that authorizes it to sell Caterpillar equipment and products. That agreement sets out the terms of their relationship as well as their respective rights and responsibilities.
Because Warren Cat is a dealer, not a franchisee, it cannot sell the rights to the Caterpillar dealership. When Caterpillar terminates a relationship with one of its dealers, Caterpillar chooses a successor and the successor purchases the previous dealer's assets for their net asset value. After Mr. Warren's death in 1999 Caterpillar gave notice that it was terminating its relationship with Warren Cat as a dealer. Mr. Warren's son-in-law, Mr. Nelson, applied for and was approved as Warren Cat's dealer principal in November 1999. Mr. Nelson and Caterpillar subsequently agreed to expand Warren Cat's territory to its current area in April 2002 so that Warren Cat could purchase the assets of another Caterpillar dealership, Darr Equipment Co. CSI, WEC's next largest subsidiary, accounts for approximately 45% of WEC's value. Based in Midland, Texas, CSI employs about 700 people and serves much of the Western United States. CSI is the sole owner of Pump Systems International, Inc. (PSI), which designs and sells fluid pump systems to the oil industry around the world. In addition, CSI is the sole owner of Rotary Compressor Systems, Inc., and Engines, Parts, & Service, Inc.
WEC's other subsidiaries are: Warren Administration Co. (Warren Admin), which provides administrative services such as accounting, information technology, risk management, and legal services for WEC's operating companies; Ignition Systems & Controls, L.P. (ISC), which is an authorized dealer of Altronic ignition and control systems throughout the Central United States; North American Power Systems, Inc. (NorAm), which sells small light towers and generators; Perkins South Plains, Inc. (PSP), which is a distributor of Perkins engines for industrial applications; and Warren Real Estate Holdings, Inc. (WREH), which finances and holds all real estate used by the operating companies, leasing it to each WEC operating company in exchange for rent payments.
C. Ownership and Shareholders Agreement As of the valuation date, 237,407 shares of WEC common stock were outstanding. Most of the common stock was held by Mrs. Nelson (indirectly through Longspar as discussed below) and her siblings: Rick Warren, Walter Stirling Warren, and Jeffrey Somers. WEC's management and Carole Warren, Mr. Warren's wife, each held a small number of the remaining shares. Mrs. Warren also held all of the outstanding shares of WEC preferred stock, with the same voting rights as shares of common stock.
A shareholders agreement (WEC shareholders agreement) restricts the transferability of WEC common stock.4 It provides that the WEC board of directors must approve all transfers of WEC common stock, and any transfer made in violation of the WEC shareholders agreement is null and void. The WEC shareholders agreement provides two routes for a shareholder who wishes to sell his or her shares. First, the shareholder can sell to a permitted transferee. Permitted transferees include Mr. Warren's lineal descendants and their spouses; a trust, family partnership or other entity organized for the benefit of a lineal descendant; a tax-exempt organization described in section 501(c)(3); or a bank towhich a security interest is granted for purposes of obtaining a loan. If shares are transferred to a permitted transferee, the transferee will succeed to all of the transferor's rights and obligations with respect to the shares and will hold them subject to the agreement. Second, the shareholder can exercise the put option included in the WEC shareholders agreement, which allows a shareholder to sell a portion of his or her shares to WEC at book value. The portion the shareholder can sell is dependent on the shareholder's age at the time he or she exercises the put option. If a shareholder chooses to exercise the put option, the other shareholders have the right to intervene and purchase the shares first.
II. Longspar Partners, Ltd. Longspar was formed on October 1, 2008, as a Texas limited partnership based in Midland, Texas. It was formed as part of a tax planning strategy to (1) consolidate and protect assets, (2) establish a mechanism to make gifts without fractionalizing interests, and (3) ensure that WEC remained in business and under the control of the Warren family.
Mr. and Mrs. Nelson are Longspar's sole general partners, each holding a 50% general partner interest (together holding a 1% interest in Longspar as general partners). On the valuation date, Longspar's limited partners and their percentage interests were as follows:
| Mary P. Nelson, as custodian for |
| Carole A. Nelson under the Texas |
| Uniform Transfers to Minors Act |
| Mary P. Nelson, as custodian for Mary |
| C. Nelson under the Texas Uniform |
| Mary P. Nelson, as custodian for Paige |
| F. Nelson under the Texas Uniform |
| Steven C. Lindgren, as trustee of the |
| Mary Catherine Nelson 2000 Trust |
| Steven C. Lindgren, as trustee of the |
| Paige Francis Nelson 2000 Trust |
| Steven C. Lindgren, as trustee of the |
| Sarah Elizabeth Nelson 2000 trust |
All partners made initial contributions of capital in the form of shares of WEC common stock.
On the valuation date, Longspar owned 65,837 shares (approximately 27%) of WEC common stock. It also owned the following: | MyVest Account (Marketable |
| Limited Partner Interest in Stevens & |
| Tull Opportunity Fund I, L.P.
|
| Limited Partner Interest in Stevens & |
| Tull Opportunity Fund II, L.P.
|
| Limited Partner Interest in Sanders |
| Note Receivable from Exponential, |
Its only liability was accounts payable of $5,000.
Longspar's partnership agreement grants its general partners full control over all partnership activities. Their powers include, among others, determining partnership activities, making expenditures and incurring indebtedness, using partnership assets, making distributions, and hiring advisers. Certain powers are subject to limitations and require approval by all partners, such as selling or disposing of substantially all partnership assets, leasing a significant portion of partnership assets for a term longer than 24 months, incurring indebtedness in excess of $5 million, or doing anything making it impossible for Longspar to carry on its ordinary business. Limited partners are not authorized under the partnership agreement to play any role in Longspar's management beyond their veto power over certain actions.
The partnership agreement restricts the general and limited partners' transfer of their Longspar interests. It allows transfers of a limited partner interest to family members and to third parties. If the transfer is to a third party, the general partners have to consent in writing or the interest first must be offered to Longspar and then to the other...
