Practical Application of Sale of Shares Clause in Shareholders’ Agreement

Author: Simon Della Marta, Partner
19 December 2011

The case of Page v Good Impressions Offset Printing Pty Ltd [i] has provided an opportunity for the Supreme Court of NSW to apply the rights of the parties in a shareholders’ agreement.

The shareholders’ agreement between two majority shareholders contains a fairly common procedure where if a shareholder wants to sell their shares then they are valued and offered for sale to other shareholders before being able to be offered for sale to an outside party.  Mr Page seeks to prove oppressive conduct by the Company and the other shareholder to have the court make an order for his shares to be purchased on terms determined by the court (presumably on more favourable terms than those set out in the shareholders’ agreement.

Mr Page complained he was forced to resign as an employee of the company due to undue financial pressures exerted on him by both the company and the other shareholder alleging they both engaged in oppressive conduct by:

• excluding him from discussions and negotiations to sell the company’s business;
• excluding him from participation in management in various respects;
• denying him access to books and records of the company; and
• attempting to issue shares in the company to an unrelated third party.

In the alternative Mr Page also asserted there was a concluded agreement to sell his shares to the other shareholders for $400,000, resigning as the director and an employee and releasing the company from liability to repay a loan said to be owed to Mr Page by the company.

Mr Page sought an order to compel the other shareholders and the company to acquire his shares asserting such a procedure was available pursuant to section 233(d) and/or (e) of the Corporations Act which provide “the court can make any order under this section that it considers appropriate in relation to the company. Including an order: . . .(d) for the purchase of any shares by any member or person to whom a share in the company has been transmitted by Will or by operation of law; (e) for the purchase of shares with an appropriate reduction of the company's share capital . . . . ”.

It is noted this section says nothing about the price of which the purchase of shares can be ordered, or the basis for the calculation of such price.  The only legal restriction on the way in which the price maybe calculated is that it be a proper exercise of judicial discretion. The Courts discretion under section 233(1)(d) is absolute.

Where it comes down to a question of valuation a buy out order “is not to compensate the shareholders for loss (although it may have that effect), but to separate the oppressor from the oppressed.

In circumstances where it is appropriate to make an order that other members purchase the shares of the oppressed shareholder, the task of the court is to fix a price that represents a fair value in all the circumstances.  It is not a question of the value but more also a question of fixing a price that should be paid.  Even if there is an agreement, as for example in the statutory contract contained in the constitution or articles association, as to the way in which the shares are to be valued, the court is free to override the agreement if it makes a finding of oppression.

The Supreme Court in Page was making determination in respect of a Notice of Motion filed by the second defendant shareholder arguing that the clause in the shareholder agreement applied and that if Mr Page wanted his shares to be acquired he is bound to give a transfer notice in accordance with the terms of the shareholders’ agreement which makes provision for the value of the shares to be determined by the company’s accountant.

Such an application was in effect an application for a final order by way of specific performance or partial specific performance of that term of the shareholders’ agreement which the court held could not properly be bought by a Notice of Motion as it was seeking, in substance, final relief.

The court held that the clause of the shareholders’ agreement could certainly be activated by Mr Page although he has not done so.

What the court did hold is that the clause in the shareholders’ agreement was not an answer to a claim by Mr Page for compulsory purchase of the shares under section 233 as it only deals with the position where a shareholder intends by voluntary act to transfer the shares.  The clause does not apply to a transfer which might occur as a result of the court making an order for the purchase of a shareholders shares pursuant to section 233(1)(d) or (e) of the Corporations Act.  The court held that valuation of the shares set out in the shareholders’ agreement was not intended to apply if the shareholder was successful in obtaining an order for purchase of their shares as result of oppressive conduct of the company’s affairs.  In addition the parties could not have, by agreement, confined the power of the court as to how the shares to be compulsory purchased should be valued.  The court held that it would have to “determine questions such as the date in which the shares to be valued, whether there is to be a discount for the shares being purchased being a minority holding, and how the valuation should be made so as to remove the depressive effect on the value of the shares of the oppressed conduct that would have been found”.

In the Page case even though Mr Page had repeatedly expressed a wish that his shares be acquired the procedure under the shareholders’ agreement was not a good answer to a claim for relief under section 233.

The Notice of Motion was dismissed and the other shareholder was ordered to pay Mr Page’s costs on the motion.

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