Accounting Firm Owner Gets to Value Firm as Dissenting Shareholder

Tennessee business valuation law case summary – accounting firm. Tennessee law from the Tennessee Court of Appeals.

Vawter, Kennedy and Kennedy v. Vawter – Tennessee valuation law – professional practice – Note: This is not a divorce case but is offered as a background for business valuation procedural law.

In the context of determining the value of a business interest for marital property distribution, how do individuals who are terminated from their corporate partnerships get a determination of the fair value of their shares and redeem their stock?  In 1989, the Supreme Court of Tennessee addressed the issue in Vawter, Kennedy and Kennedy v. Vawter.

In 1981, Bobby Kennedy and his brother entered into an agreement with Vilas Vawter to create the accounting firm of Vawter, Kennedy and Kennedy, P.C. As members of the professional corporation, each of the Kennedy brothers owned twenty-five percent of the corporation and Vawter owned fifty percent.

In 1984, the corporation issued an additional one hundred shares of stock.  Forty-five of these newly issued shares were sold to Von Gammon, and the remaining fifty five shares were divided among the three original shareholders. Subsequently, Mr. Vawter and Mr. Gammon entered into a voting trust agreement which assigned Mr. Vawter as proxy for Mr. Gammon’s shares, effectively giving him control of 52.5% of the corporation.

In November of 1985, Mr. Vawter voted his shares to terminate Bobby Kennedy as an employee, officer and director of the corporation, and a buy-out of Mr. Kennedy’s shares was proposed. Thereafter, Mr. Kennedy filed suit against Mr. Vawter and Gammon, alleging derivative causes of action for redemption, dilution of stock value, and nonderivative causes of action for fraud, civil conspiracy, breach of fiduciary duty, and voting trust violations.

Mr. Kennedy brought suit in the name of the corporation, Vawter, Kennedy, and Kennedy, P.C. as a dissenting shareholder entitled to valuation and payment for his shares in the corporation pursuant to T.C.A. §§ 48-3-405(c) and 48-1-915. Mr. Kennedy requested that the court determine the fair value of his shares and require the corporation to redeem his shares of stock.

The defendants Mr. Vawter and Mr. Gammon filed a motion to dismiss Mr. Kennedy’s suit, arguing that he had no cause of action under T.C.A. §§ 48-3-405(c) and 48-1-915. The Chancellor agreed with the defendants’ argument and granted the motion to dismiss on the grounds that §§ 48-3-405(c) only allowed for redemption of the stock of a deceased, retired or disqualified shareholder.  Since the plaintiff was involuntarily terminated from his employment with the corporation, the Chancellor decided that Mr. Kennedy did not fall within any of those categories.

The majority of the Court of Appeals affirmed the Chancellor’s dismissal of Mr. Kennedy’s complaint, but for entirely different reasons.  The Court of Appeals found that plaintiff Mr. Kennedy failed to name the proper parties to the derivative actions for determination of stock and redemption of shares, since §48-1-915 required that shares of stock be valued and redeemed by the corporation, and not shareholder defendants.

The Supreme Court agreed with the Court of Appeals that §48-1-915 made it clear that the relief granted is against the corporation and that the corporation is also the party plaintiff. However, the Supreme Court reversed the Court of Appeals decision, agreeing with Court of Appeals Judge Crawford’s dissenting opinion that the Court was overly technical in dismissing the complaint since the technical defects could have easily been remedied by remanding the case and allowing the plaintiff to amend the complaint under Rule 17, T.R.C.P.

The Trial Court treated the complaint as properly filed, but dismissed it on the grounds that plaintiff Kennedy did not have a cause of action under T.C.A. § 48-3-405 since he did not retire from the corporation but was involuntarily terminated.  While the Trial Court interpreted “retire” to mean voluntary termination of employment, and not involuntary termination of employment, the Supreme Court interpreted the word “retire” to mean to retire from, withdraw from or to terminate employment.  Consequently, the Supreme Court held that Mr. Kennedy qualified as a retired shareholder under § 48-3-405(c), allowing him to bring suit as a dissenting shareholder under § 48-1-915.

776 S.W.2d 520 (Tenn. 1989).

See original opinion for exact language. Legal citations omitted.

To learn more about Tennessee business valuation law, see Business Valuation in Tennessee Divorce Law. To learn more about the division and valuation of professional practices in divorce, see When Professionals Divorce in Tennessee: Valuing Professional Practices.

Miles Mason, Sr. JD, CPA handles complex divorce matters including business valuations and forensic accounting issues. View his professional biography listing books and articles published on business valuation and forensic accounting and seminars presented to lawyers, judges, business valuation experts, and forensic accountants. Miles Mason, Sr. authored The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association. The Miles Mason Family Law Group, PLC’s offices are located in Memphis, Tennessee and serves West Tennessee and Nashville. Contact Us today at (901) 683-1850.