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Go Back, Do It Again - A Look at Buy/Sell Agreements, Rock Band Steely Dan Go Back, Do It Again - A Look at Buy/Sell Agreements, Rock Band Steely Dan

Go Back, Do It Again - A Look at Buy/Sell Agreements, Rock Band Steely Dan

Most business owners have been advised at some point to adopt agreements dealing with company ownership and succession, commonly known as buy/sell agreements, and to keep them up to date. The recent lawsuit involving the rock band, Steely Dan, provides a powerful reminder of the importance of that advice.
Numerous news sources have reported the original members of Steely Dan entered into a buy/sell agreement for Steely Dan Inc. in 1972, the same year as the band's first major label album, "Can't Buy A Thrill."

By 2010, the only remaining shareholders and signatories of the agreement were Walter Becker and Donald Fagen, but the buy/sell agreement was reportedly never amended. Upon Becker's death in 2017, Fagen commenced litigation to enforce the buy/sell agreement. As reported, the agreement allows Steely Dan Inc. to repurchase the shares owned by Becker at his death at book value. Becker's estate is apparently taking the position the agreement is no longer in effect and his widow is owner of 50 percent of the shares in the company. The uncertainty over control and ownership of the company and its profits will follow Fagen during Steely Dan's 2018 tour and beyond.
Dirty work
A buy/sell agreement addresses a number of sensitive issues that can be uncomfortable for owners to think about and challenging to resolve. For example, if a shareholder dies, becomes disabled, voluntarily terminates employment with the company, is fired for cause, gets married or divorced, leaves to compete with the business or retires, all of these events present different circumstances that should be addressed.
Should the company have an option to purchase the interests of the departing owner, or should the repurchase be mandatory? Perhaps the answer should vary with the reason for the departure. The involvement and interest in the business of spouses and family members of the departing owner will affect those decisions. The purchase of life insurance to fund a repurchase can also be considered. The matrix of issues and options can require owners to engage in some "Pretzel Logic," so it is important to deliberate thoughtfully and thoroughly with the help of outside advisers.
Don't lose that number
The price of any repurchase of ownership interests is an overriding issue. Book value (generally defined as assets minus liabilities) of the company is easy to determine but is generally a low valuation, especially for a music group whose assets are largely intangible and subject to wide fluctuation in worth. Other options for establishing the value/price of ownership interests include:
  • Retaining one or more professional appraisers to complete a valuation
  • Establishing a formula by agreement
  • Or requiring a periodic review by the owners to establish an agreed value
The goal of any mechanism is to strike a balance in providing fair value to the departing owner and his or her heirs while at the same time avoiding an excessive financial burden to the company and the remaining owners that can adversely affect the prospects and even survival of the business. The method of valuation may need to be revisited and changed to fit the circumstances.
Steely Dan's original agreement on book value may have been sufficient when the band was starting out, but may not have been realistic when only two owners were sharing a company with significantly increased value. The pros and cons of each method of valuation depend on the goals of the owners and the financial status of the business, among other things, and should be discussed with experienced advisers.
Reelin' in the years
Effective planning for a "Change of the Guard" as a business matures requires buy/sell agreements be periodically reviewed and updated to reflect changes in circumstances, changes in the company and changes in laws. Between 1972 and 2017, the ownership, value and business of Steely Dan Inc. were completely transformed, and the failure to keep its buy/sell agreement up to date with economic reality made a dispute inevitable.
And as "Any Major Dude Will Tell You," the adverse economic and emotional consequences of a dispute will be more costly for the owners than the effort required to consult advisers and adopt and update a custom designed buy/sell agreement.
Dave Hight is the office managing partner of Ice Miller's DuPage office and can be reached at (630) 955-5821 or at

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. 
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