Owners of family-owned businesses sometimes enter into agreements between each other for the purchase and sale of shares in the business.  Ideally, these agreements are negotiated, documented and implemented in a way that each party is satisfied with the result – e.g., one owner acquires additional shares while the other owner receives the agreed-to cash value for the shares and exits the business.  But sometimes one party (often the seller) will claim that the deal was not fair, that he or she did not in fact receive the full value of the shares or that the agreement should be voided due to “economic duress.”

In order to render an agreement voidable due to economic duress, a party must show that he or she was subjected to wrongful pressure that forced him or her to surrender to unlawful or unconscionable demands.  The resulting agreement itself also must be found to be unjust, unconscionable or illegal.  Courts routinely caution, however, that “hard bargaining,” without more, does not rise to the level of coercion needed for a successful duress claim.  In Rasby, v. Pillen, 905 F.3d 1097 (8th Cir. 2018), the Eighth Circuit Court of Appeals recently addressed a selling shareholder’s claim that an agreement to sell her shares in a family-owned business was the result of economic duress and that the agreement was therefore voidable.

Since 1994, Deborah Rasby had been a 10% owner in Progressive Swine Technologies (“PST”) a Nebraska company that provided management services to customers in the swine industry.  She also owned 5%-10% interests in five other PST affiliated companies.  She had acquired these interests without any cash investment.  Rasby also was PST’s accountant.  James Pillen owned the remaining shares of PST and its affiliates.  Rasby retired in 2011, claiming that her working relationship with Pillen had deteriorated after Pillen’s daughter joined PST.

Rasby also claimed that PST had previously distributed its profits in amounts sufficient to pay taxes Rasby owed as a shareholder.  After Rasby retired, Pillen caused PST to stop these distributions to Rasby, which, she claimed, left her “fearful that she could not afford to pay taxes on her PST investment.”  Pillen further notified Rasby that he planned to liquidate PST “since it no longer meets our business objectives.”  Pillen then offered $1.8 million for Rasby’s interests in the companies and provided the calculations Pillen’s accountant used to value the interests.

In response, Rasby engaged an experienced lawyer to help evaluate her options.  Specifically, Rasby considered selling her interests to Pillen, selling her interests to a third party or suing Pillen for minority shareholder oppression.  She also considered retaining her own valuation expert but did not do so. Ultimately, Rasby agreed to sell her interests to Pillen for over $2.3 million.  Rasby’s lawyer then negotiated a unit purchase agreement with Pillen’s lawyer.  The agreement contained a mutual release of all claims between Rasby and Pillen.  Rasby acknowledged that she reviewed the release before signing the agreement and that she knew it was a complete release of all liability by either party.

After Rasby sold her shares, Pillen started a new business – Pillen Family Farms – that continued to provide the same services as PST previously had.  Rasby then sued Pillen, seeking restitution of the alleged “excess benefit” Pillen received from his purchase of her shares.  Rasby further argued that the unit purchase agreement was the product of economic duress.  In particular, Rasby argued that she was “terrified” that she would not be able to pay her tax obligations as a shareholder of PST if she did not receive future distributions from the company.  Thus, she claimed that she had “no realistic options” other than selling her shares. The district court dismissed all of Rasby’s claims, concluding that Rasby had not proven duress and that the release in the agreement barred Rasby’s claims.

On appeal, the Court of Appeals agreed that Rasby did not prove either element of economic duress. The Court noted that “[m]inority shareholders in close corporations frequently face challenges in disposing of their equity interests.” However, according to the Court, Rasby was an experienced businesswoman and accountant.  She voluntarily retired from PST, thus giving up her annual salary.  Further, as a minority owner, Rasby had no reasonable expectation that the PST entities would continue to pay dividends to help pay for her taxes. She also was represented by competent counsel in connection with the agreement and considered many options, including litigation, before signing the agreement, which she acknowledged contained a broad release of claims.  Thus, according to the Court, Rasby did not prove that anything Pillen did “destroyed her free agency to choose” whether to enter the agreement.

Rasby also did not prove that the agreement itself was unjust, unconscionable or illegal.  Instead, according to the Court, “[i]t was neither unfair nor inequitable for Pillen to seek to purchase the interest of a minority shareholder who was no longer actively involved in the enterprise.”  Further, Pillen provided the valuation methodology and invited Rasby to consult her own valuation expert.  And even though Rasby took the position in litigation that she was paid only a small percentage of the shares’ fair value, her own lawyer testified that the price Pillen paid was not unconscionable.  Because Rasby could not demonstrate that she entered the agreement as a result of economic duress, the Court decided that the mutual release barred all of her claims against Pillen arising from her share ownership.

The Rasby case serves as a reminder that, even after a stock sale transaction closes, a seller still may assert claims for additional payments, particularly if later developments with the business or remaining owners lead to a sense of “seller’s remorse.”  One way a seller may try to unwind an agreement or to seek additional payments is by claiming that the agreement resulted from economic duress.  To try to limit a seller’s ability to prevail on such a post-sale claim, a buyer, at a minimum, may want to ensure that the seller has the opportunity: (1) to review and understand the terms of any agreement presented; (2) to retain and consult competent counsel, and (3) to review the valuation methodology and retain his or her own valuation expert in connection with the sale price.  A buyer also will want to include as broad a release as possible to cover claims arising from the seller’s relationship with the company and with the buyer.   By doing so, a buyer may be better able to ensure that a stock purchase and sale agreement fully concludes the relationship between the parties in connection with the family-owned business.