Ward v. Midcom, Inc., s. 20008

• Citation: 575 N.W.2d 233,1998 SD 10
• Decision Date: 04 February 1998
• Docket Number: 20015,Nos. 20008,s. 20008
• Parties: 1998-1 Trade Cases P 72,056, 1998 SD 10 Dean WARD, Plaintiff and Appellant, v. MIDCOM, INC., Defendant and Appellee.
• Court: Supreme Court of South Dakota

Page 233

575 N.W.2d 233

1998-1 Trade Cases P 72,056, 1998 SD 10

Dean WARD, Plaintiff and Appellant, v. MIDCOM, INC., Defendant and Appellee.

Nos. 20008, 20015.

Supreme Court of South Dakota.

Argued Dec. 2, 1997.

Decided Feb. 4, 1998.

Mark V. Meierhenry of Danforth, Meierhenry & Meierhenry, Sioux Falls, for plaintiff and appellant.

Monte Walz and Keith A. Gauer of Davenport, Evans, Hurwitz & Smith, Sioux Falls, for defendant and appellee.

SABERS, Justice.

¶1 This matter arises out of three contracts executed between the defendant corporation and an employee/shareholder. The disagreement centers on the enforceability of an amended stock purchase agreement and its noncompetition clause. The trial court ruled (1) the noncompetition provision was unenforceable, and (2) the amended stock purchase agreement was not severable and therefore also unenforceable. Midcom appeals (1) and Ward appeals (2). We reverse (1), holding the noncompetition clause was partially enforceable, requiring (2) an increased price under the amended stock purchase agreement.

FACTS

¶2 Dean Ward worked for Midcom, Inc., a Watertown electronics firm, in February of 1987 after Midcom was bought by Persona, Inc. ¹ The purchase of Midcom was a leveraged transaction, with $2,700,000 borrowed toward the approximate purchase price of $3,300,000. On July 10, 1987, Ward paid $18,000 for 705.88236 Midcom shares, which were immediately pledged as collateral for the bank loan. Ward's purchase represented 3.25% ownership of shares in the company.

¶3 Also on July 10, 1987, Ward ² entered into a stock purchase agreement (SPA1) with Midcom which obligated Midcom to buy back the stock upon Ward's request, death, or termination of employment. SPA1 provided that the buy-back price was to be "based on the book value of the corporation, based on internal company generated financial statements[.]"

¶4 On July 31, 1989, Ward and Midcom executed an "ADDENDUM TO STOCK PURCHASE AGREEMENT" (Addendum), which provided in part:

II

RECITALS:

A. On July 10, 1987 Midcom, Inc. entered into a Stock Purchase Agreement with certain key employees to permit them to purchase shares of Class B non-voting common stock in the Corporation. This agreement is an Addendum to the July 10, 1987 Stock Purchase Agreement.

. . . . .

C. Under the July 10, 1987 Stock Purchase Agreement, Midcom is required to repurchase the individual Shareholder's shares upon his death, termination of employment or request. The repurchase price is the book value of the corporation per share, based on internal company generated financial statements[.]

D. In connection with a Stock Purchase Agreement among the Persona, Inc. Shareholders, they are annually required to determine the fair market value of the Persona stock. In this process, Persona annually determines the fair market value of Midcom, Inc.

E. The purpose of this Addendum is to encourage these Class B Shareholders to remain at Midcom and Persona as productive employees over a long period of time by increasing their participation in the growing equity of Midcom, Inc.

III

CONSIDERATION:

As part of the consideration for Midcom's agreements in this Addendum, each of the Shareholders agrees for himself that:

. . . . .

B. In the event of the termination of employment of any of these Shareholders, the terminated employee shall not, directly or indirectly, enter into competition with Midcom or Persona for a period of five years; nor shall he divulge any trade secrets of Midcom or Persona.

IV

STOCK VALUATION:

. . . . .

B. In the event that Midcom, Inc. becomes obligated to purchase a Shareholder's shares under [SPA1] because of the Shareholder's termination of employment or request for repurchase for reasons other than the Shareholder's disability, except under conditions which violate the shareholder agreements of Article III above, the purchase price shall be the "book value per share" price described in [SPA1] plus the portion of the "fair market value per share" price described in the following schedule:

1. For each of the first five full years of the Shareholder's employment at Persona or Midcom after February 10, 1987, five percent (5%) of the difference between the "book value per share" and the "fair market value per share," plus

2. For each of the second five full years of the Shareholder's employment at Persona or Midcom after February 10, 1987, seven percent (7%) of the difference between the "book value per share" and the "fair market value per share," plus

3. For each of the third five full years of the Shareholder's employment at Persona or Midcom after February 10, 1987, eight percent (8%) of the difference between the "book value per share" and the "fair market value per share."

Thus, after fifteen full years of employment at Persona or Midcom after February 10, 1987, the purchase price of the Shareholder's stock shall be the fair market value rather than the book value.

The fair market value used in the calculation described above shall be the last fair market value determined by the Persona, Inc. Shareholders preceding the Midcom Shareholder's death, termination of employment or request for repurchase.

¶5 The final agreement executed by the parties was another stock purchase agreement (SPA2) dated December 18, 1992, in which it was agreed that the shareholders who held Class B stock under SPA1 could exchange their stock for Class A stock for no additional consideration. SPA2 provided that the Class A stock "shall continue to be bound by the restrictions on transfer, valuation agreements and other provisions contained in [SPA1 and Addendum]." ³ SPA2 also contained the following "savings" clause:

The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and the Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.

¶6 Ward's employment with Midcom ended on September 29, 1995. ⁴ Ward brought a declaratory judgment action to determine the legal effect of SPA1, the Addendum, and SPA2. On cross-motions for summary judgment, the trial court granted partial summary judgment to Ward, ruling 1) the Addendum was void because its noncompetition agreement was unlawful in the absence of a geographical limitation, and therefore, 2) SPA1's stock valuation formula dictated the buy-back price. The court ordered Midcom to buy back Ward's shares at book value rather than at the increased price provided by the Addendum. ⁵ The trial court held that the savings clause of SPA2 served only to save SPA2's provisions to the exclusion of its unlawful noncompetition clause, but did not affect the Addendum.

¶7 Ward appeals, agreeing with the trial court that the Addendum's noncompetition agreement is unlawful but claiming that the Addendum's stock valuation formula is severable and thus enforceable. He argues that the savings clause of SPA2 effectively treats the Addendum as though it never contained the noncompetition clause, leaving its increased stock valuation formula in full force.

¶8 By notice of review, Midcom argues the noncompetition agreement is lawful and the entire Addendum enforceable. Midcom states it "has remained ready and willing to pay Ward the approximate sum of $1.2 million to repurchase his stock as determined by the formula set forth in [Addendum] provided Ward is required to likewise live up to his end of the bargain, the five year noncompetition agreement contained in the same contract." Because we find Midcom's notice of review issue dispositive, we do not address Ward's arguments regarding the effect of SPA2's savings provision on the earlier contracts. See Wood v. City of Crooks, 1997 SD 20, p 1 n.2, 559 N.W.2d 558, 559 n.2 ("Principles of judicial restraint dictate that when an issue effectively disposes of the case, other issues that are presented should not be reached.") (quoting Poppen v. Walker, 520 N.W.2d 238, 248 (S.D.1994)).

STANDARD OF REVIEW

¶9 The construction of a contract is a question of law which we review de novo. Schleuter Co., Inc. v. Sevigny, 1997 SD 68, p 15, 564 N.W.2d 309, 313 (citing Alverson v. Northwestern Nat'l Cas. Co., 1997 SD 9, p 5, 559 N.W.2d 234, 235). Questions of statutory interpretation also require de novo review. Maynard v. Heeren, 1997 SD 60, p 5, 563 N.W.2d 830, 833. Since there are no factual issues in this case, summary judgment will be affirmed if the trial court correctly decided the legal issues presented. Weiss v. Van Norman, 1997 SD 40, p 9, 562 N.W.2d 113, 115 (citations omitted).

¶10. WHETHER THE NONCOMPETITION PROVISION IS ENFORCEABLE.

¶11 A noncompetition agreement is a contract in restraint of trade and such contracts are generally void. See SDCL 53-9-8:

Every contract restraining exercise of a lawful profession, trade, or business is void to that extent, except as provided by §§ 53-9-9 to 53-9-11, inclusive.

As indicated, SDCL 53-9-9 through -11 provide the exceptions to the general rule. We agree with the trial court that because the noncompetition clause was executed in conjunction with a stock buy-back agreement, SDCL 53-9-9 applies:

One who sells the good will of a business may agree with the buyer to refrain from carrying on a similar business within a specified county, city, or part thereof, so long as the buyer or person deriving title to the good will from him carries on a like business therein. ⁶

See 6A Corbin on Contracts § 1388, at 59-60 (1962):

It is usually held that a shareholder in a corporation has an interest in the good will as well as in the tangible assets to such an extent as to justify a promise by him, made to a purchaser of his shares, that he will not thereafter compete with the corporation within a reasonable space and time. This is proper in case the shareholder who sells has theretofore been actively engaged in the conduct of the business with a wide acquaintance with the customers; but generally the decision...