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Will – Interpretation of Provision

Midgett v. O’Brien (VLW No. 017-8-110, 9pp.) (Lannetti, J.) Norfolk Cir.Ct. Case No. CL17-4956.

Holding: Where the plaintiff-son and defendant-daughter dispute the terms of their mother’s will regarding a provision allowing the son to purchase his sisters’ shares of a corporation, the deceased’s intent was not to require her son to pay more for the shares than a complete stranger would pay and the will’s intent is not only plain from the context of the surrounding language but with what the testator almost certainly intended, we find that the fair market value of the shares available for purchase by the son is $1,538,000. Where the son requested that the daughter cooperate in a corporate valuation in December 2015 but the daughter refused, and the corporation was valued in July 2017, the testator recognized through the will’s provisions that the valuation and purchase option may be delayed, and we find that it would not be appropriate to penalize the daughters for this delay and the proper valuation date is July 27, 2017.

Facts: The deceased was survived by two daughters and a son. At the time of her death, the deceased owned 70 percent of the stock of the corporation, which operates a miniature golf course. Her son owned the other 30 percent of the stock, having been employed there for 32 years and in charge of the corporation’s day-to-day business for 20 years. The deceased executed a will that provided for equal distribution of the shares, with an option for the son to purchase the daughters’ shares.

The son had a bank appraise the corporation in conjunction with an application for a loan, ostensibly to purchase the daughters’ shares. The daughter serving as co-executor with the son did not agree that the appraisal met the will’s requirements, and declined to cooperate with him in authorizing the corporation’s accountant to value the corporation in December 2015. The court found, in a related suit, that “the accounting firm then serving the Corporation” named in the will to perform the valuation was not qualified. The court entered an order directing the parties “to authorize a mutually agreed upon firm to conduct the valuation per the Will.” The retained firm calculated the fair market value of the corporation—as of December 10, 2015, and as of July 27, 2017—for the following ownerships: a 70 percent ownership interest, representing the deceased’s; a 46.66 percent ownership interest, representing the daughters’ shares; and a 23.33 percent ownership interest, representing each daughter’s shares individually. Each included discounts for lack of marketability and minority interest, as prescribed by the will. The son filed suit for declaratory judgment, seeking the court’s direction regarding how the shares in the corporation should be valued for the purpose of the son purchasing the daughters’ shares and the appropriate valuation date.

The son argues that the appropriate valuation is the fair market value of a 46.66 percent ownership and that the lack of marketability and minority interest discounts must be applied because it represents a noncontrolling interest. He argues that it is illogical to consider the discounts as if he were purchasing a 70 percent block of interest and that, considering the context of the will, the valuation of the shares must be based on the number of shares owned by the trust “not otherwise allocated to him hereunder” and that to interpret it otherwise is in direct conflict with the provision stating that “[t]he purchase price shall be equal to the fair market value of such shares of stock to be purchased.” Additionally, he notes that the deceased’s intent in including discounts was to prevent the son from overpaying for the shares, not to make him pay more than another willing buyer. He argues that the appropriate date of valuation is December 10, 2015, because it was “the date the valuation would have been commissioned were it not for [the daughter’s] refusal to cooperate. He therefore ascribes a valuation of $1,378,000.

The daughter argues that the deceased’s entire 70 percent ownership interest needs to be valued prior to calculating the 46.66 percent interest available for the son’s purchase. She contents that discounts for lack of marketability and minority interest therefore are not “appropriate” or “applicable” as contemplated by the will. She argues that the proper valuation date is July 27, 2017, which accounts for appreciation or depreciation of the shares as anticipated by the will. Calculating the value of the deceased’s shares in this way yields a fair market value of the shares available for the son’s purchase at $2,330,334.

Analysis: One question before us is how to value the option purchase. The applicable will provision provides as follows: “In the event my son … survives me, I hereby grant and give to my son the exclusive right and option to purchase, under the terms as hereinafter set forth, not less than all of the interests the Family Trust may own in [the corporation], not otherwise allocated to him hereunder. In allocating shares in the Corporation to [the son], he may be allocated one-third (1/3) of the shares given to the Family Trust or may be allocated such shares as shall equal in value his one-third (1/3) share of the Family Trust, or any amount in between, in [the son’s] discretion. The purchase price shall be equal to the fair market value of such shares of stock to be purchased, which shall be based upon such assets’ value as of the date of my death as finally determined for estate tax purposes, plus any appreciation or depreciation occurring thereafter, if any, and the refutable presumption shall be that there is no such change in value. If no estate tax return is required to be filed, fair market value shall be determined by the accounting firm then serving the Corporation and such value shall take into account appropriate discounts for the number of shares of stock owned by the Family Trust, including, but not limited to, discounts for lack of marketability and for minority interest, if applicable.” (Emphasis added.)

The provision read as a whole provides the necessary context. The discount option must be read in conjunction with the prior references to the shares of stock of the corporation being valued. All references in the will provision regarding valuation are to the fair market value of the shares that otherwise would go the daughters, and thus are available to be purchased by [the son]. The use of the term “such value” in the will refers back to the “fair market value of such shares of stock to be purchased” (emphasis added), which itself refers back to the shares “not otherwise allocated to [the son] hereunder.” The valuation of concern therefore is the fair market value of the shares of stock in the corporation available to the son for purchase, which is a 46.66 percent ownership interest. If, for analysis purposes, the son had elected to purchase none of the remaining shares, another buyer would have the ability to purchase only a 46.66 percent interest in the corporation, not a 70 percent ownership interest. This interpretation of the will provision is not only plain from the context surrounding language; it also is consistent with what the testator almost certainly intended. The court finds that the deceased’s intent was not to require her son to pay more for the shares than a complete stranger would pay, especially given that her son is the only person apparently willing and able to carry on the family business. Based on the above, the court finds that the fair market value of the shares of stock in the corporation available to be purchased by the son, as determined by the firm, is $1,538,000.

The deceased clearly intended that the shares in the corporation available to be purchased by the son be valued—and her son be given the opportunity to exercise the option to purchase those shares—shortly after her death. She also recognized, however, that the valuation and exercise of the option could be delayed. The will provides the following: “The purchase price shall be equal to the fair market value of such shares of stock to be purchased, which shall be based upon such assets’ value as of the date of my death as finally determined for estate tax purposes, plus any appreciation or depreciation occurring thereafter, if any, and the refutable presumption shall be that there is no such change in value.” (Emphasis added.) The inability of the corporation’s accountant to conduct the valuation and related litigation significantly delayed the valuation through no fault of the son, although the court also finds it would not be appropriate to penalize the daughters for this delay. The court therefore finds that the daughters are entitled to the appreciated value of the shares, and therefore, the proper valuation date of the shares is July 27, 2017.

VLW 017-8-110