BC Journal

Connelly v. United States is a 2023 legal case that involved the valuation of business shares in a buy-sell agreement. The case upended several longstanding precedents and highlighted new legal considerations for buy-sell agreements.

While the case awaits final judgement from the Supreme Court, business owners should note several important takeaways. Owners are encouraged to consult experienced professionals for specific guidance.

1. A buy-sell agreement should have a clear valuation mechanism.
2. A valuation or formula should be approved annually and memorialized in the corporate minutes.
3. An agreement should be effective during life and at death.
4. The funding vehicle should not be owned by the company, as the court ruled that corporate-owned insurance proceeds can increase the company’s value for tax purposes. This creates a discrepancy between the entity’s taxable value and its transfer value. It also invites potential litigation by departing partners or heirs, who may claim they are entitled to the difference.

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The Right-of-First-Refusal is a common provision in buy-sell agreements. This provision gives existing business partners the opportunity to purchase a departing partner's shares before they are offered to an outside party. The shares must be offered to existing partners at a specified price outlined in the buy-sell agreement. This protects existing owners by allowing the business to remain in their hands.

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Come-Along Rights protect minority shareholders in a buy-sell agreement by allowing them to participate in any sales initiated by majority shareholders.

If a majority shareholder receives an offer, the minority shareholders can "come along" and sell their shares at the same price and under the same conditions offered to majority shareholders. This ensures minority shareholders are not excluded from the deal or forced to sell at a discount.

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