The Share Buyback Denial: What If Your Company Says No?

A shareholder agreement is a document outlining the terms that govern the relationships among a corporation’s shareholders. Within this agreement, the rights and responsibilities of the parties involved are clearly defined. On the other hand, a share buyback refers to the process where a company reacquires the shares it initially issued. This allows the company to regain ownership of a portion of its shares that were previously distributed to investors during the initial sale.

Companies typically engage in share buybacks when they possess available funds and are optimistic about their future performance. The primary objectives behind repurchasing shares include boosting the company’s stock value and enhancing its financial position.

In this article, we will explore the circumstances under which a company can execute share buybacks and what actions you can take if the company declines such repurchases. Additionally, we will discuss how enlisting the services of a commercial litigation lawyer can be instrumental in addressing these issues effectively.

When is it Permissible for a Company to Repurchase its Shares?

A company may repurchase its shares from the open market or directly from the shareholders. A corporation buys shares from individual shareholders by allowing them to offer their shares to the corporation at a fixed price. A shareholder may also force the company to buyback its shares in certain circumstances.

A shareholder agreement can provide that before selling their shares to third parties, shareholders must offer them to other shareholders or the company first. A share buyback allows a company to prevent the dilution of its ownership.

Shareholders can also compel the company to buyback its shares in some instances. Shareholders may have dissent rights when a company undergoes a significant transaction, such as an acquisition. A shareholder can force the company to repurchase its shares at fair value by exercising its dissent rights.

When the company refuses to repurchase its shares despite specific terms in the shareholder agreement, the aggrieved shareholder can file a claim for breach of contract and shareholder oppression. In such cases, the Court may order the company to purchase a minority shareholder’s stock.

What Steps to Take When the Company Declines a Share Buyback Request

A company is obligated to repurchase its shares if the conditions mentioned in the shareholder agreement for the share buyback are satisfied.

If an event triggers the share repurchase terms of the shareholder agreement, the shareholder seeking the sale of its shares can send the company a demand notice. In the demand notice, the shareholder may briefly describe the triggering event and propose to sell its shares per the terms of the shareholder agreement.

If the company refuses to repurchase its shares or objects to the price offered, the aggrieved shareholder can commence the dispute resolution process.

Many shareholder agreements provide that the shareholders must resolve their disputes through alternative dispute resolution (ADR) methods such as mediation, arbitration, or med-arb. If the shareholder agreement contains such a term, the parties must adopt the dispute resolution process mentioned therein.

In mediation, a neutral third party facilitates dispute settlement through discussion. The mediator cannot make a binding decision in the matter. However, a compromise reached as a result of mediation is binding on the parties.

Arbitration is a legal procedure where a neutral third party, called an arbitrator, decides the case after considering both parties’ evidence and arguments. The arbitrator’s decision is called an arbitral award. Depending on the terms of the arbitration agreement, the arbitral award can be binding or non-binding.

A med-arb or mediation/arbitration is a legal process that combines mediation and arbitration. In med-arb, a neutral third person tries to get the parties to settle the dispute through discussion, failing which the same person renders a decision.

If the matter is not resolved using one of the ADR methods or the shareholder agreement does not contain an enforceable dispute resolution clause, you may sue the company.

How to Initiate Legal Action Against the Company for Denying Share Buyback

When the company refuses to buy its shares per the terms of the shareholder agreement or any contract between the company and its shareholders, the aggrieved shareholder may file a shareholder oppression claim against the company.

A shareholder oppression claim allows a shareholder to approach the Court if the corporation or a majority shareholder acts in a way that is oppressive, unfairly prejudicial, or disregards the interests of a minority shareholder.

To be successful in a shareholder oppression claim, the aggrieved shareholder must show that the corporation failed to meet your reasonable expectations as a shareholder. They must also specify their reasonable expectations and how the company could not meet them.

The Court has broad discretion to remedy shareholder oppression and can order the company to buyback the shares of the aggrieved shareholder.

A company may be liable for breach of contract if it refuses to repurchase its shares despite specific terms in the shareholder agreement. The remedies for breach of contract include monetary and non-monetary damages, specific performance of the contract and injunctive relief.

Specific performance is an equitable remedy that entitles the aggrieved person to the performance of a particular act. The aggrieved shareholder may request specific performance of the share repurchase terms in the shareholder agreement.

How a Shareholder Disputes Lawyer Can Assist

When your company refuses a share buyback, seeking legal counsel becomes a crucial step in protecting your interests and navigating the complexities of shareholder disputes. Here’s how a skilled Shareholder Disputes Lawyer can be of assistance:

Legal Experience: Shareholder disputes can be intricate, involving various laws and regulations. A lawyer experienced in shareholder disputes brings a deep understanding of corporate and contract law, ensuring your rights are upheld and your case is well-prepared.
Mediation and Negotiation: Often, disputes can be resolved through mediation or negotiation before escalating to full-scale litigation. A lawyer can act as a mediator, facilitating discussions between you and the company to find a mutually agreeable solution.
Document Review: Your lawyer will meticulously review the company’s articles of incorporation, bylaws, shareholder agreements, and any relevant contracts to assess the validity of the buyback refusal and identify potential breaches.
Drafting Legal Documents: If negotiation fails, your lawyer can draft legal documents, including demand letters and legal complaints, to initiate legal action against the company.
Litigation Representation: In cases where litigation becomes necessary, your lawyer will represent you in court, presenting a compelling case to ensure your shareholder rights are protected.
Exploring Remedies: Your lawyer will assess the damages you may be entitled to, explore remedies like injunctive relief or specific performance, and work to secure a favorable outcome.

Remember, having a Shareholder Disputes Lawyer by your side can make a significant difference in the outcome of your case, ensuring your rights are upheld and your interests protected throughout the dispute resolution process.

Conclusion

If your company refuses to repurchase its shares despite the shareholder agreement containing such terms, you may be able to sue it for breach of contract and shareholder oppression. While it may seem simple, making a claim without legal representation can be risky.

A shareholder disputes lawyer can help you negotiate with the company. They will also navigate the legal system using their knowledge and experience. A simple consultation lets you understand what needs to be done and how a shareholder disputes lawyer may help your case.

Contact Achkar Law

If you want to enforce a buyback clause in your shareholder agreement, our skilled, knowledgeable, and experienced shareholder disputes lawyers at Achkar Law can help.

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