A recent First Department case, Sina Drug Corp. v. Mohammad Ali Mohyuddin,1 has demonstrated the importance of considering tax consequences when negotiating settlements concerning a buyout of shares, and the associated considerations when drafting any accompanying release provisions. This is important not only for the obvious reason of avoiding a tax bill that was not on the negotiating table at the time of settlement, but also to prevent further litigation over any alleged impropriety of the company in question amending its tax returns to reflect undistributed income for a period of freshly recognized “share ownership” before the settlement. In short, having this discussion will go some way to ensuring the success of your settlement.
Sina also serves as a helpful reminder of when a party can and cannot “buy peace” through a liquidated damages provision and when such a provision is considered an unenforceable penalty.
