loader image

Buy-Out Clause in a Company’s Constitution

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp

INTRODUCTION

Disputes amongst business partners are common. In fact, it is an inherent risk that one must assume when setting up a company with a few other partners/associates. One pivotal clause which often escapes the eyes of the business partners in the adoption of a Company’s constitution is a “Buy-Out” clause.

To put it simply, a “Buy-Out” clause makes provisions for the purchase of a shareholder’s shares by the other shareholders in a company in the event of a dispute, deadlock, or other triggering events.

Incorporating a “Buy-Out” clause in a constitution may eradicate the need to bear the brunt of a protracted fight in Courts when disputes ensue between shareholders at the expense of the Company’s operations.

COURT'S APPROACH WHEN THERE IS A BUY-OUT CLAUSE

Generally, an aggrieved shareholder must resort to a “Buy-Out” clause before mounting an oppression claim in Court. In the English case of Re A Company (No 004377 of 1986), the Court struck out an unfair prejudice petition and had this to say:

    In these circumstances it seems to me that if the articles provide a method for determining the fair value of a party’s shares, a member seeking to sell his shares on a breakdown of relations with other shareholders should not ordinarily be entitled to complain of unfair conduct if he has made no attempt to use the machinery provided by the articles.
The approach taken by the Court is in keeping with the spirit of a “Buy-Out” clause in the Company’s constitution. It deters any gung-ho complainant from jumping the gun and filing an oppression claim which may stifle a company’s business operation. In the same breath, it provides a less complex avenue for any aggrieved shareholders to “exit” a company and do away the need to prove the oppressive conducts of the majority.

An example of how this clause was enforced in Court can be seen in the local case of Wu Sor Hwa & Ors [2020] 9 MLJ 217. In this case, the “Buy-Out” clause was incorporated into the shareholders’ agreement. A dispute ensued between the shareholders, prompting the Plaintiff to file the action to enforce the buy-out clause in the shareholders’ agreement. The Court agreed with the Plaintiff’s case and ordered that the non-defaulting shareholders purchase the defaulting shareholders’ shares at NTA values of the Company (as per the “Buy-Out” clause).

POTENTIAL HICCUPS

There is, however, potential hiccups in the enforcement of a “Buy-Out” clause derived from its ambiguity and uncertainty. Commonly, a “Buy-Out” clause will stipulate that the shares be bought at a “fair value”. What is then a “fair value” price of shares? If it was not pre-determined, then there is a great likelihood that the feuding shareholders may disagree on the valuation method when dispute ensues.

However, this can be pre-empted by filing up the gaps in the “Buy-Out” clause at the point of agreement.

CONCLUSION

In short, it is apt for business partners to agree and adopt a “Buy-Out” clause before the union of a business relationship.
Disclaimer: The contents of this write-up is intended for general informational purposes only and does not constitute legal advice.

Share This Post

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
×

Hello!

Chat with us on WhatsApp or send us an email to office@tcclaw.com.my

×