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Renberg v. Zarrow

Supreme Court of Oklahoma
1983 OK 22, 667 P.2d 465, 1983 Okla. LEXIS 153 (1983)
ELI5:

Rule of Law:

A stock buy-sell agreement in a closely held corporation that sets a specific price or formula for valuing shares is enforceable, even if there is a great disparity between the agreement price and the actual market value, provided the agreement was negotiated at arm's length and is not the product of fraud, overreaching, or bad faith.


Facts:

  • The Zarrow family members were the sole shareholders of Sooner Pipe & Supply Corporation (Sooner), a closely held corporation.
  • In 1963, all shareholders, including Dorothy Zarrow Renberg, executed a Stock Purchase Agreement giving surviving shareholders an option to buy a deceased shareholder's stock.
  • The agreement stipulated that the purchase price would be set annually by a majority of shareholders, and if no new price was set, the most recent price would prevail.
  • On June 27, 1975, the shareholders last set the price at $3,500 per share, at which time Dorothy was advised that the book value was between $9,000 and $10,000 per share and was offered full access to financial information.
  • After her father Sam Zarrow died in 1975, Dorothy, as co-executor of his estate, used the agreement's $2,250 valuation (the price before the 1975 update) to minimize estate taxes.
  • In 1977, after being diagnosed with a terminal illness, Dorothy discussed her own estate plan using the $3,500 per share value for her Sooner stock.
  • Dorothy died in April 1978 without ever having requested a shareholders' meeting to revalue the stock, despite having the power to do so.
  • In April 1979, the surviving Zarrow shareholders exercised their option to purchase Dorothy's shares from her estate at the agreed-upon price of $3,500 per share.

Procedural Posture:

  • George Renberg, as successor trustee of Dorothy Renberg's trust, commenced an action against the surviving Zarrow shareholders in the trial court.
  • The plaintiffs initially sought to prevent the transfer of shares, but an agreed order was entered allowing the purchase to be completed.
  • Plaintiffs then filed an amended petition seeking money damages, alleging breach of contract, unjust enrichment, and breach of fiduciary duty.
  • The trial court found for the defendants (Zarrows), holding that the 1963 agreement was valid, enforceable, and had not been breached.
  • The plaintiffs (Renbergs) appealed the trial court's judgment to the Oklahoma Supreme Court.

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Issue:

Does a stock buy-sell agreement in a closely held family corporation become unenforceable due to a significant disparity between the agreed option price and the stock's actual market value, where the deceased shareholder had knowledge of the disparity and opportunities to seek a price change but failed to do so?


Opinions:

Majority - Hodges, J.

No. A stock buy-sell agreement is enforceable despite a significant disparity between the option price and market value, provided it was entered into without fraud, overreaching, or bad faith. The court reasoned that such agreements are valid and reasonable restrictions on stock alienation, intended to ensure continuity of ownership in a close corporation. The agreement was negotiated at arm's length, was unambiguous, and created a 'mutuality of risk' since no party knew at the outset whether they would be a buyer or a seller. The court emphasized that Dorothy had full knowledge of the stock's increasing value, had access to all financial records, and possessed the power to call a meeting to revalue the shares but chose not to. Furthermore, Dorothy had previously taken advantage of the agreement's low valuation for her own financial benefit in handling her father's estate. The court concluded it will not rewrite a contract to relieve a party from an improvident bargain, especially where there is no evidence of fraud or breach of fiduciary duty.



Analysis:

This decision strongly affirms the principle of freedom of contract in the context of closely held corporations, prioritizing the enforcement of clear buy-sell agreements over later claims of unfairness. It establishes that a mere disparity in price is insufficient to invalidate such an agreement, placing a heavy burden on shareholders to actively monitor and seek adjustments to agreed-upon valuation formulas. The ruling also clarifies that the fiduciary duty of majority shareholders does not extend to proactively protecting a minority shareholder from the consequences of an agreement when that minority shareholder has equal access to information and the power to protect their own interests. This precedent provides significant certainty for business owners using buy-sell agreements for estate planning and succession purposes.

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