May 19, 2023
If you incorporate your privately held business, your lawyer will probably advise both you and the other shareholders to enter into a unanimous shareholder agreement. This usually includes a buy-sell provision.
Typically, our clients file away these documents and forget them, until one day, they pulled it out and read the buy-sell provisions.
THE ISSUE
If you choose to trigger the buy-sell provisions, you can expect that the courts will hold you to the full terms of the agreement – you cannot pick and choose which terms you will apply.
THE CASE
This was the difficult lesson learned by a shareholder in Leeder Automotive Inc. et al v. Warwick, a case in which the major shareholder in an automobile dealership group sought to buyout minority shareholders. The shareholders agreement provided that the parties to the buy-sell would hire a mutually agreed upon valuator to set the price for the shares. Instead of following that provision, Leeder, the proposed buyer, hired a valuator with whom they had a long-term relationship. That valuator came to a conclusion that was favorable to Leeder by excluding a large one-time transaction from the value of the corporation. Warwick, the proposed seller, refused to accept that valuation and refused to sell their shares.
The buyer commenced an application for an order for specific performance of the contract. Although we often think of specific performance in terms of real estate, specific performance of share transactions is also possible where the shares are unique, such as shares in a closely held private corporation.
Unfortunately for the buyer, the proposed seller was successful in convincing the application judge that the choice of valuator did not conform to the provisions of the unanimous shareholders agreement, and therefore that valuation was in breach of the terms. The seller could not be compelled to sell.
You might think that the previous sentence should read “sell at that price”. However, the applications judge ruled that the proposed seller could not be compelled to sell at any price.
This is because under the law of contract, the innocent party, when faced with a breach of the contract, has a choice whether to terminate the contract or continue with the performance of the contract. In this case, the proposed seller chose to terminate the buy-sell transaction and carry on as a shareholder.
Unlike a John Grisham novel, there is no neat ending here. We do not know if Leeder eventually offered a better deal to Warwick and bought him out, or whether that will happen in the near future. Warwick owns a very small shareholding and that is often a very uncomfortable position. However, it appears that Warwick has good legal advice and if Leeder acts oppressively towards Warwick, there may be another lawsuit. It would be like a sequel to a Grisham novel.
TAKEAWAYS
- Courts take the provisions of unanimous shareholder agreements seriously.
- Provisions in unanimous shareholder agreements are typically extremely technical. Unless you are both knowledgeable and experienced, it is best to have a lawyer advise you before initiating a buy-sell provision or responding.
- Technicalities matter.
- The court will not allow you to pick and choose which provisions you want to have enforced if you want the court to help you.
- For instance, in order to benefit from specific performance, you must be in compliance with your obligations.
- If you are in breach, you run the risk that the other party will choose to terminate the transaction rather than complete it.
- That is their option, not yours.
- It is best to get it right in the first place.
The cost of legal advice on the transaction is minor compared to the cost of litigation, or the opportunity cost of having the transaction fall apart.
HOW WEILERS LLP CAN HELP YOU
At Weilers LLP we encourage our clients to take the time to think about the risks that they are accepting under contracts. We know that our clients understand their businesses. We like to work with our clients closely enough to gain an understanding as well.
We are just a phone call or an e-mail away if you have a question about something in one of your contracts. We always appreciate it when you call us before you sign the contract rather than after something bad has happened.
Weilers LLP has 75 years experience in drafting shareholder agreements and advising clients about the provisions of their agreements. We act regularly in buy-sell situations and are adept at steering our clients around obstacles.
If, despite best efforts, the deal hits the rocks and requires dispute resolution, we have a team of litigation and arbitration lawyers skilled and experienced in shareholder disputes.
Whether you need a shareholders agreement drafted, advice regarding your rights, representation in a transaction, or help resolving a dispute, we invite you to give us a call to see whether Weilers LLP may be the right lawyers for you.