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05 May 2021
In the context of M&A transactions, majority shareholders often enter into call options exercisable in specific cases (eg, misconduct) to protect the interests of the company.
In a recent case, Mr A entered into a shareholders' agreement pursuant to which he undertook to transfer his shares on the first demand to the majority shareholder should he engage directly or indirectly in an activity competing with the company's activity.
Following the majority shareholder's exercise of the call option, Mr A refused to transfer his shares and argued that such transfer could not be enforced by the court as the transfer price of the shares had not been agreed and had to be determined by an expert. On 13 January 2021 the Supreme Court ordered Mr A to transfer his shares despite the dispute over their price.
Mr A was an employee and a minority shareholder of the company and in 2009 signed a shareholders' agreement.
The shareholders' agreement stated that Mr A irrevocably promised to transfer his shares to the majority shareholder, which in return irrevocably promised to buy such shares should Mr A engage in an activity competing with the company's activity. The transfer price was to be agreed by Mr A and the company and then paid on the transfer date. However, the shareholders' agreement provided that in the case of a disagreement on the transfer price, such price will be determined by an independent expert and paid within eight days of the final determination by the expert. The shareholders' agreement also stipulated that in the case of a transfer of Mr A's shares prior to 31 December 2018, the transfer price of Mr A's shares would not be less than a base price.
In 2016 Mr A was dismissed and then hired by a competitor of the company. The majority shareholder exercised the call option but Mr A refused to transfer his shares as the parties did not agree on the transfer price.
In March 2017 an independent expert was appointed to determine the final transfer price of Mr A's shares.
In December 2017 the company and the majority shareholder sued Mr A and asked the court to order:
On 10 January 2019 the Pau Court of Appeal granted these requests and ordered the immediate payment of the base price of Mr A's shares and decided that following the final determination of the transfer price by the expert, the majority shareholder must pay within eight days any additional amount due to Mr A.
Mr A considered that:
On 13 January 2021 the commercial division of the Supreme Court confirmed the Pau Court of Appeal's decision and held that:
The enforcement of shareholders' agreements or call option provisions governing the transfers of shares of defaulting shareholders are of utmost importance in M&A transactions.
This decision is interesting as it confirms that a share transfer can be enforced notwithstanding the fact that the transfer price is not yet finally determined, provided that the price determination process (including determination by an expert should the parties fail to agree) is clearly set out in the agreement. Therefore, shares can be transferred and the transfer price paid later, provided that such price can be determined.
The court also considered the confidentiality and competition issues faced by the company as the shareholder which is in breach of its contractual obligations continues to have access to sensitive company information as long as they are a shareholder of the company.
For further information please contact Alain Levy, Gwenaëlle de Kerviler or Valérie Attia at AYACHE by telephone (+33 1 58 05 38 05) or email (email@example.com, firstname.lastname@example.org or email@example.com). The AYACHE website can be accessed at www.ayachelaw.com.
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