Dispute Prevention: A Strong Shareholder Agreement
In the recent case of Gestion Steve Perreault inc. c. 9310-7803 Québec Inc.1, the Superior Court addressed a dispute concerning the valuation of shares in a construction company, through an action in passing of title. This decision highlights the importance of having clear, complete, and well-drafted shareholder agreements.
Summary of Facts
The case involved a disagreement over the appropriate method for calculating the value of shares when a shareholder decided to withdraw from the company. The shareholder agreement (hereinafter “agreement”) detailed the method for calculating the share value. However, the defendant considered the price proposed by the plaintiff to be too low, as it did not fully comply with the agreement’s stipulations. The court had to determine the value of the shares at the time of the sale. Furthermore, the Court had to decide on the applicability of a 25% penalty clause. The plaintiff argued that the defendants’ actions constituted a “withdrawal from the business,” while the defendants claimed they had only ceased employment with the company, thus preventing the application of the penalty clause.
Court Decision
The court’s decision relied on the precise wording of the shareholder agreement. The judge emphasized the principle that parties are bound by the clearly defined terms of their agreements, even when the outcome is not ideal for one of the parties. The court rejected attempts by one party to deviate from the stipulated valuation methods, highlighting that unambiguous language in a contract eliminates the need for interpretation.
[19] The Agreement is a contract that constitutes, in itself, the law governing the parties. The plaintiff cannot invoke, contrary to the Agreement, other elements, facts, or factors that could justify another valuation of the shares […].
[20] Therefore, we must refer to the intention of the parties and order the repurchase of the shares […] based solely on the mechanism for establishing the sale price of the shares provided for in Section 9.5 of the Agreement.2 (Our translation)
Next, the court clarified the concept of controlling interest. A section of the agreement provided for a 25% reduction in the sale price of the shares in the event of a “withdrawal from the business.”
[52] Thus, for the defendant […] to lose the benefit of obtaining 100% of the price of its shares, its controlling shareholder must perform an act corresponding to a case of withdrawal from the business by refusing or neglecting “(…) systematically, without valid reason, to perform the duties he has undertaken to perform for the company […], or terminates […] this contract, without valid reason and without the agreement of the Board of Directors.”
[53] The plaintiff argues that the two defendants, who exercise control over the corporate shareholder 9310, resigned without notice, which clearly constitutes a case of “withdrawal from the business.”
[54] The defendants essentially argue that this is not a case of withdrawal from the business for two reasons:
(1) Neither of them exercises control over the defendant 9310; […]
[…]
[58] According to the defendants, given the fact that each of them holds 50% of the voting shares of 9310, neither of them exercises effective control since neither has enough shares to give them the right to elect the “majority” of the directors.
[59] The plaintiff argues that the two defendants exercise control […] since they together hold 100% of the shares and both have made the decision to leave the company […].
[60] The plaintiff is right.
[…]
[62] […] [T]he control of a company is generally understood to mean de jure control and de facto control […]. The ability to elect the majority of directors generally equates to the power to choose those who manage the affairs of the company, […].3 (Our translation)
Concluding that the defendants’ actions did constitute a withdrawal from the business, the court applied the 25% penalty to the previously determined value of the shares.
Key Takeaways
It is essential to have well-drafted, unambiguous shareholder agreements governing the methods for calculating the value of shares in the event of a shareholder’s departure. Clear clauses preventing future disputes should be prioritized.
Furthermore, controlling interest, even in the absence of strict control, can be established by the court based on the circumstances, particularly if the company’s decisions are made jointly by shareholders who hold it in equal shares.
Finally, a clear agreement may provide for penalties or adjustments to the share price in the event of a “withdrawal from the business,” but the court will only apply them if the conditions are strictly met and clearly established in the contract.
To support you in any corporate law matter, it is advantageous to team up with lawyers who have extensive experience in this field. Do not hesitate to contact us so that we can offer you complete and personalized support at every stage of your business projects.
Written with the collaboration of Laury-Ann Bernier, Law Lecturer.
1 Gestion Steve Perreault inc. c. 9310-7803 Québec inc., 2024 QCCS 4.
2 Id., par. 19 et 20.
3 Id., par. 52-62.