When a Buy-Sell Agreement Backfires: Lessons from Katsikoumbas v. Katsikoumbas
Buy-sell agreements are meant to provide a structured process for business owners who want to leave or transfer their ownership interests. They establish who can buy the departing owner’s stake, how the price is determined, and what steps must be followed. When written clearly, they prevent disputes by ensuring all parties understand their rights and obligations. When drafted poorly, they can create more problems than they solve.
Katsikoumbas v. Katsikoumbas is a case that highlights how a lack of clarity in a buy-sell provision led to years of litigation. A dispute over whether one party could force a sale or if mutual consent was required resulted in conflicting court rulings. The trial court blocked the sale, while the appellate court reinstated it. This conflict could have been avoided with better contract drafting.
What a Buy-Sell Agreement Is Supposed to Do
A buy-sell agreement sets the rules for ownership transfers in closely held businesses. It typically follows a structured process.
If an owner wants to sell, they must first offer their stake to the other owners or the company before seeking outside buyers.
The remaining owners have a set period, often 30 to 60 days, to either accept or decline the offer.
If they decline, the selling owner may look for an outside buyer, sometimes with restrictions to prevent unwanted third parties from entering the business.
Some agreements include forced sale provisions, meaning that if the parties cannot agree on an internal buyout, the business or its assets must be sold.
Others contain shotgun clauses, where one owner names a price, and the other must either buy or sell at that price.
These agreements are meant to provide a clear exit strategy and prevent business disruptions. In Katsikoumbas, unclear contract language led to the exact conflict that a buy-sell provision is supposed to avoid.
The Dispute Over a Poorly Drafted Clause
The company’s operating agreement contained a buy-sell clause stating that if a member wished to sell, they had to first offer their shares to the other member. If the offer was not accepted within 30 days and the parties could not agree on a price, the company’s main asset would be sold on the open market.
But the contract was not clear about whether one party alone could force the sale or whether both had to agree.
In 2021, the minority owners offered to sell their stake to the majority for $8.75 million or buy the majority’s stake for $9 million. The majority refused both options, arguing that the contract required both sides to agree to sell before a forced sale could happen. The minority owners took the position that the provision allowed either party to trigger the sale if no internal buyout was reached.
Unable to agree, the minority owners sued, asking the court to enforce the provision and order the sale of the company’s asset. The majority owner countered that the contract did not allow a forced sale without mutual agreement.
The Courts Disagree on What the Contract Means
The trial court ruled in favor of the majority, concluding that the buy-sell provision required both parties to agree to sell before the forced sale provision could apply. The court found that the contract’s language suggested a scenario where both sides wanted to exit but could not agree on price or terms, making a sale of the company’s assets the logical outcome. Since the majority owner never agreed to sell, the court determined that the provision had not been triggered.
The appellate court disagreed and reversed the decision. It focused on the contract’s specific wording, ruling that “if either the majority or minority party wishes to sell” meant either party could invoke the provision without the other’s consent and thus reinstated the forced sale process.
The Katsikumbas v. Katiskumbas Case
How Better Drafting Could Have Prevented the Dispute
The entire case resulted from a lack of clarity in the contract. If the agreement had explicitly stated whether a forced sale required one party’s decision or mutual consent, there would have been no basis for litigation.
A well-drafted buy-sell clause should:
Clearly define what triggers a sale. If either party can force a sale, the contract should say, “If either party wishes to sell and the other does not accept the offer within 30 days, the company’s asset shall be sold.” If mutual agreement is required, the clause should say, “A sale of the company’s asset requires agreement by both parties.”
Establish a transparent pricing method. The contract should specify how the price is determined, such as through independent appraisals, to avoid disputes over valuation.
Outline the process for selling the asset. The agreement should define who selects brokers, how marketing is handled, and what happens if one party delays the sale.
Include a dispute resolution mechanism. Mediation or arbitration clauses can provide a faster and less expensive way to resolve disagreements before they escalate into lawsuits.
The Legal Dispute Cycle
Lessons for Business Owners
A buy-sell agreement is meant to provide certainty. Katsikoumbas shows what happens when key terms are left open to interpretation. Business owners and attorneys should ensure that buy-sell provisions:
Use precise language to avoid ambiguity
Clearly define whether a sale requires one or both parties to consent
Provide a structured, enforceable process for valuation and execution
Anticipate potential conflicts and include dispute resolution mechanisms
A few extra sentences of clarity in the contract could have saved both parties years of litigation. When drafting or reviewing a buy-sell agreement, assume that a future dispute will happen and write the contract in a way that eliminates room for argument.