What to Do If the Company Refuses to BuyBack Shares?
A shareholder agreement contains the terms governing the relationship between the shareholders of the corporation. It defines the rights and obligations of the parties to the agreement. A share buyback refers to the repurchase of the shares by the company that issued them. It allows a company to reabsorb a portion of the ownership it previously distributed among investors when selling its shares. Companies tend to repurchase stock when they have cash in hand and are optimistic about their prospects. Generally, companies repurchase their shares to raise their stock value and improve their financial statements. When can a company repurchase its shares? What can you do if the company refuses to buyback its shares? How can a commercial litigation lawyer help?
These questions will be answered in the article below.
When Can a Company Buyback 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 to Do When the Company Refuses to BuyBack Shares
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 Sue the Company for its Refusal to Buyback its Shares
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 Commercial Litigation Lawyer Can Help
Many companies have a legal department headed by a chief legal officer (CLO), or general counsel. The CLO helps the company deal with legal issues, such as:
- legal and regulatory compliance,
- changes in law, human rights violations, and
- employee accommodation requests.
The company’s in-house legal team reports to the CLO. The CLO, in turn, reports to the board of directors and senior management through the company’s chief executive officer.
The CLO advises and assists the company’s lawyer with the litigation. The company’s lawyer has the company’s vast legal and financial resources at their disposal to help them with the litigation. A commercial litigation lawyer with specialized knowledge of the law and legal process can help you protect your interests.
A commercial litigation lawyer can help you participate in pre-litigation processes like ADR and negotiation. This could result in the settlement of the dispute before litigation.
Commercial litigation is complex and technical, given the number of rules involved and the expertise required to navigate each step. A small error or mistake could be fatal to your claim.
If you fail to plead your case properly, provide sufficient evidence, ask the relevant question at discoveries, or make weak legal arguments at trial, you may hurt your case.
A commercial litigation lawyer can help you navigate the commercial litigation process to maximize your chances of success.
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 commercial litigation 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 commercial litigation lawyer may help your case.
