Future Considerations for Business Buyout
June 1, 2021 | View PDF
Rather than answer your question directly I want to discuss a recent Alabama Supreme Court case that will make you think about how these agreements are structured. The structuring could mean that in the event of your death within the seven-year period your estate could either continue to receive money promised under the contract(s) or not receive it. This can be a substantial financial benefit to your heirs if your attorney advises you correctly.
The recent case was John Boyd and Batey & Sanders, Inc. v. Emily Hawk Mills, as personal representative of the Estate of Thomas Batey, deceased, which initially arose from the Etowah County Circuit Court. The facts were that Thomas Batey sold all of his stock to Boyd as its president and to Batey & Sanders, Inc. through a stock purchase agreement. Other contracts were also signed including a non-compete agreement and an employment agreement. The stock agreement required that the non-compete and employment agreement of Batey also be signed to make the execution of the stock purchase valid. The total price under the non-compete was just over two million dollars. All the non-compete included was a promise that Batey would not do certain things. It was based on 120 equal monthly payments, which of course is ten years. With almost $641,000 remaining to be paid after several years of payment, Batey died. For several more months the buyers made most of their payments but then stopped all together. There were three years remaining for payment. The trial court held for the estate of Batey in that the non-compete was not a personal services agreement and the buyers appealed.
The Supreme Court was asked only to determine whether the non-compete survived Batey’s death. It was necessary that the Court look at the plain language of the contract and not create a new one. In fact, the non-compete did not address what would occur in the event of Batey’s death. The non-compete simply laid out the payment plan for ten years and what the buyers were entitled to do should Batey breach the contract. There were no duties that Batey had to perform under the non-compete only that he would be paid and the fact that he had to refrain from doing certain things. The buyers did not have a right to cancel the non-compete if Batey should breach the contract though Batey had the right to cancel the non-compete if the buyers defaulted in their duties. Looking at other case law the Court noted that a contract which relies on “personal performance by the promisor is of the essence and the duty imposed cannot be done as well by others as by the promisor himself, are personal and do not survive his death.” This was not the case in Batey. The Georgia Court of appeals held in Mail & Media, Inc. v. Rotenberry, 213 Ga.App. 826,446 S.E.2d 517 (1994), “[w]hen a noncompetition agreement ancillary to the sale of a business does not also require the seller to affirmatively provide services to the buyer, the essential benefit the buyer is purchasing is the business’s goodwill (as opposed to the seller’s expertise),”so” the seller’s death does not deprive the buyer of this benefit....” The buyers self-acknowledged that they were sophisticated in the negotiation of this agreement. Sophistication does not mean in the legal sense that they knew the best wines, the best restaurants in Alabama or stuck out their pinky when drinking an afternoon tea, but simply means these individuals had the requisite experience and education necessary to be involved in the understanding, negotiation and execution of such an agreement. This definition is not from a legal dictionary but rather the general understanding and the memory that lies between my ears from my legal education and experience.
The bottom line reached by the Alabama Supreme Court was in agreement with the trial court in that the non-compete obligations of the buyers did not cease at the death of Batey.
It is unfortunate that your health is not the best and such a situation like Batey could potentially play out. In any contract it is important to consider all scenarios and address them within the context of the agreement. Whenever a company is involved with multiple shareholders the likelihood of the sudden death of all of them is very small. Even with an individual involved in a contract that has generally good health the chance of death is probably small, but an unforeseen death of a single shareholder has greater consequences to one or all parties dependent on duties. For that reason, I hope that your counsel will look at all avenues of the agreement considering the effect on your ability to perform or the effects of your inability to perform either due to disability or death and even what that may mean to your estate and/or heirs.
As always if you do not have an attorney, ask a trusted friend or family member or contact the Alabama State Bar, Lawyer Referral service.
This article is informative only and not meant to be all inclusive. Additionally this article does not serve as legal advice to the reader and does not constitute an attorney- client relationship. The reader should seek counsel from their attorney should any questions exist.” No representation is made that the quality of legal services performed is greater than the quality of legal services performed by other lawyers.”