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Is Your Shareholders' Agreement Clear?

on Friday, 07 December 2018.

A recent case in the High Court has highlighted the importance of drafting contracts clearly and ensuring that the provisions are similarly understood by all parties.

In this instance, there was an overarching shareholders' agreement that bound all shareholders, but the case specifically concerned a second shareholders' agreement entered into only by the three major shareholders of a company.

The central issue was the interpretation of the second shareholders' agreement. For example, a term that was subject to differing interpretations was that of a price offered by a “bona fide third party purchaser”. The court agreed with the claimant that this term, in this context, meant a party that is completely unconnected to any of the shareholders who are parties to the second shareholders' agreement. The selling shareholder's attempt to base the price for its shares on a price which had been proposed by another shareholder’s subsidiary therefore did not qualify as an arm’s length transaction, especially as the term 'third party' was used throughout the agreement to refer to people unconnected to any investor.

The judge emphasised that where rights of first refusal and similar mechanisms for share transfers are clear and commercially sensible and coherent, it is very difficult for the court to order that a different interpretation should apply.

In this case, the court also considered that this second shareholders' agreement was entered into between only some shareholders for their own specific purpose and would therefore be construed as a contractual agreement. There is a probability the outcome would have been different had all of the shareholders been parties to this agreement.

This case demonstrates the importance for clear drafting in shareholders' agreements so that key points such as share transfers are not disputed later.

For more information, please contact Emma Cameron in our Corporate Law team on 01923 919 305.