Reversal: COA rules for gas installer company’s founder in valuation dispute

An appellate panel reversed in favor of the founder of a natural gas installation company after it found the value of his shares under a buyback provision in a company agreement couldn’t be discounted for lack of marketability and control.

For more than 15 years, Blake Hartman was a founder and former president of BigInch Fabricators & Construction Holding Company, which fabricates and installs natural gas and pipeline compressor/pumping stations. Ten shareholders made up the corporation, and no one held a majority position.

A shareholder agreement entered into by the shareholders of BigInch’s corporate predecessor required BigInch to purchase the shares of any shareholder who was involuntarily terminated as an officer or director of the company. Thus, the required purchase provisions triggered when Hartman was fired from his position as a director and officer at BigInch.

Wonch Valuation Advisors reported Hartman’s shares at $3,526,060, but discounted the amount due to his lack of controlling interest in BigInch and his lack of marketability. The report therefore determined the fair market values of Hartman’s shares to be $2,398,000.

When Hartman filed a petition for declaratory judgment as to the value of the shares, the Parke Circuit Court issued summary judgment, concluding that BigInch could discount the value of the shares for lack of control and marketability.

A divided Indiana Court of Appeals reversed in Blake B. Hartman v. BigInch Fabricators & Construction Holding Company, Inc., 19A-PL-2263, holding that as a matter of law, the value of shares under the buyback provision in the shareholder agreement, which required the appraised market valuation, could not be discounted for lack of marketability and control when BigInch is required to purchase the shares.

“The Wonch report appraised the market value of the Company and calculated the per share value of this total market value figure by dividing the Company’s value by the number of shares, resulting in a per share price of $396.90. Based on the 8,884 shares owned by Hartman, his share of the appraised market value of the Company amounted to $3,526,060,” Judge Patricia Riley wrote for the appellate majority, joined by Judge Paul Mathias.

“This reflects the appraised value of the shares based on the market value of the Company and corresponds with the requirement of the Shareholder Agreement to utilize the appraised market value. As there is no sale of the shares in the open market, the discounts for lack of control and marketability cannot be taken into account in the calculation of the shares’ value in this compelled transaction. Consequently, as the trial court erred, as a matter of law, by applying these discounts, we reverse the trial court’s summary judgment,” the majority concluded.

Although she concurred that the trial court erred by granting BigInch’s motion for summary judgment, Judge Elizabeth Tavitas in a separate opinion dissented in part “to the extent that the majority opinion fails to address Hartman’s motion for summary judgment in its conclusion.”

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