Utah Court of Appeals
What constitutes the "last audited financial statement" for stock buyout purposes? Willis v. Adams and Smith Explained
Summary
Former employees Willis and Darby resigned from Adams and Smith Inc. and demanded the company purchase their stock pursuant to a Restrictive Stock Agreement. The parties disputed whether the purchase price should be based on the 2013 audited financial statement (completed April 2014) or the 2014 statement (completed March 2015, after resignations). The district court ruled in favor of Willis and Darby on summary judgment and after trial.
Practice Areas & Topics
Analysis
In Willis v. Adams and Smith, the Utah Court of Appeals addressed a critical contract interpretation question that frequently arises in closely held corporation stock agreements: what constitutes the “last audited financial statement” for determining stock buyout prices?
Background and Facts
Gordon Willis and Jeffrey Darby were long-term employees and shareholders of Adams and Smith Inc. who resigned on January 20, 2015. Their Restrictive Stock Agreement required the company to purchase their shares at a price based on “the last audited financial statement of [the company] preceding the event requiring the determination of the purchase price.” The dispute centered on whether to use the 2013 financial statement (audit completed April 15, 2014) or the 2014 statement (audit completed March 18, 2015, after their resignations). The 2014 statement showed substantially lower book value due to a loss contingency.
Key Legal Issues
The court addressed three main issues: (1) the proper interpretation of “last audited financial statement” in the stock agreement, (2) the meaning of “any equipment” for book value adjustments, and (3) whether Willis was properly disclosed as a non-retained expert witness under Rule 26(a)(4)(E) for equipment valuation testimony.
Court’s Analysis and Holding
The Court of Appeals affirmed the district court’s contract interpretation, applying correctness review. The court analyzed the grammatical structure of “last audited financial statement,” determining that “audited” modifies “financial statement” as an adjective-noun unit, with “last” modifying the entire unit. This plain language required the most recent completed audit before the triggering event, not the most recent year’s financial statement regardless of audit completion timing. The court also upheld the district court’s interpretation that “any equipment” referred to all company equipment capable of standing alone to perform work, and that Willis’s disclosure as a witness with “information regarding valuation of equipment” was sufficient under the discovery rules.
Practice Implications
This decision highlights the importance of precise drafting in corporate stock agreements. Practitioners should clearly specify whether valuation dates refer to completed audits or calendar years. The ruling also demonstrates that courts will apply ordinary grammar rules to contract interpretation and that adequate disclosure of non-retained expert witnesses requires more than general topic identification but need not follow the formal requirements for retained experts.
Case Details
Case Name
Willis v. Adams and Smith
Citation
2019 UT App 84
Court
Utah Court of Appeals
Case Number
No. 20170626-CA
Date Decided
May 16, 2019
Outcome
Affirmed
Holding
The district court correctly interpreted the stock agreement’s requirement to use the “last audited financial statement” as referring to the most recently completed audit preceding the triggering event, not the most recent financial statement regardless of when audited.
Standard of Review
Contract interpretation reviewed for correctness, factual findings reviewed for clear error, discovery rulings reviewed for abuse of discretion
Practice Tip
When drafting stock purchase agreements, use precise language to specify whether “audited financial statement” refers to the most recent completed audit or the most recent year’s statement, regardless of audit completion timing.
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