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Oral Shareholders' Agreement? Not so Much

Posted by Attorney Stephen Hance | May 19, 2014 | 0 Comments

The 2012 North Dakota Supreme Court decision of Rickert v. Dakota Sanitation Plus, 812 N.W.2d 413 (N.D. 2012) (“Rickert”) provides a cautionary tale for business owners out there that have undocumented agreements regarding ownership. Basically, unless it is in writing, it will not likely be binding.

Rickert involved a family owned sanitation business. The owner, Harvey Rickert, died in 1998. Harvey Rickert expressed his wishes in writing before his death (though not in a valid will) that upon his death the business should be equally divided among his two children (Kim and Mark Rickert) and his fiancée (Peggy Becker), who worked in the business. He further stated it was his wish that in 2007 (at the end of a long-term sanitation contract) the assets of the business should be given to Ms. Becker. After his death, the survivors formed a corporate entity and split the stock equally according to Harvey Rickert's wishes.

During the intervening years, the three of them split the profits equally with Ms. Becker managing the business. Then in 2007, Ms. Becker and Kim Rickert held a shareholders' meeting wherein they voted to dissolve the company and transfer the assets to a newly formed entity owned solely by Ms. Becker. Mark Rickert objected, and brought a lawsuit seeking a recovery for the full value of his ownership interest.

Ms. Becker and Kim Rickert claimed there was an oral agreement among all three survivors after Harvey Rickert's death consistent with his wishes, namely, that assets of the company would go to Ms. Becker in 2007. Not having the alleged agreement in writing turned out to be Ms. Becker's downfall.

The case reaffirms the significance of laws that require a written document to create an enforceable agreement. The Court in Rickert considered two such statutes. Under N.D.C.C. §10-19.1-83, shareholders in North Dakota corporations are authorized to agree on matters concerning control, liquidation and dissolution of a company but the statute requires that any such agreement must be in writing, signed by all of the shareholders and filed with the corporation. Similarly, N.D.C.C. §9-06-04(1) provides that any contract which cannot be performed within a year is invalid unless memorialized in a signed document.

Relying on the above statutes, the Court determined that since there was no written agreement to the contrary, Mark Rickert was entitled to the full fair value of his interest in the company and that for purposes of the award, the company had a value at the time of dissolution of $557,273.00.

It is likely that a similarly large amount of money went to the lawyers for their work in the litigation. As this case shows, it is important to memorialize shareholder agreements in writing. One thing the owners could have done in 1998 to possibly avoid their conflict would have been to enter a buy-sell agreement.

The buy-sell agreement is an agreement wherein the co-owners of a company agree in writing as to what will happen upon the occurrence of certain trigger events such as death, termination, deadlock or other events. When one of the events occurs, it triggers an optional or mandatory buy-out by the company or other shareholders at agreed upon terms. Shareholders often procrastinate on getting buy-sell agreements in place but cases like this one demonstrate that oral agreements are illusory.

About the Author

Attorney Stephen Hance

Steve represents and advises clients that are dealing with business and real estate disputes. Steve is an investor and business owner, and his approach is unique from other attorneys.

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