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buy-sell agreement, each officer ultimately would have been
entitled to receive the book value of his stock upon his death or
earlier termination of employment.4
The parties agree that the book value of the redeemed stock
shortly before the redemptions was $4,391 per share. The average
redemption price of $4,750 per share therefore exceeded that book
value by approximately 8 percent.
Demco’s equity capital immediately before the redemptions
consisted of 1,800 shares of voting common stock, 1,200 of which
were owned by Mr. Wall. The 600 shares redeemed therefore
represented a one-third, voting but noncontrolling, interest in
Demco. If (1) the average redemption price was equal to the fair
market value of the redeemed stock and (2) each share of Demco’s
stock had the same value, then after adjusting for the greater
number of shares (13,200) outstanding at the time of the gifts,
the $4,750 average redemption price would have been equivalent to
approximately $432 per share.5
4 As matters turned out, two of the officers did not retire
until 6 years after the redemptions, in 1998; the third officer
was still employed by Demco at the time of trial (March 1999).
5 The calculation is ($4,750 average redemption price per
share) times (1,200 shares outstanding after redemption) equals
($5,700,000 post-redemption value) divided by (13,200 shares
outstanding at time of gifts) equals ($432 per share).
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Last modified: May 25, 2011