Legal Updates

Significant Supreme Court Precedent on Redemption Clauses in Shareholders’ Agreements

One of the primary goals of a shareholders’ agreement in privately held companies is normally to ensure that the company’s shares remain in the hands of employees. Therefore, a good shareholders’ agreement will mandate the redemption of shares from a shareholder, for example, in the case of termination of employment and other events that might cause shares to fall outside of the control of the company and its active employees. In this respect, the Supreme Court of Finland has recently issued a significant precedent (KKO 2020:34) on the mechanism to be applied when redeeming shares based on a shareholders’ agreement, which may require shareholders’ agreements (and/or the articles of associations) of a company to be tuned-up.

Broadly speaking, according to the Supreme Court, the conclusion of a shareholders’ agreement, which includes an obligation for the employee to offer his shares for redemption at the termination of his employment, does not constitute such a sufficient consent of the shareholder that would enable the company to carry out a “forced/compulsory redemption” of the shares within the meaning of the Finnish Companies Act. Instead, in case of a dispute between the parties, when looking to enforce the shareholders’ agreement for the purpose of redeeming shares, recourse may have to be sought from the agreed dispute resolution mechanism. Accordingly, although the existence of a shareholders’ agreement normally can act as a deterrent against shareholder disputes, but when disputes do occur, it does not necessarily provide sufficient means of resolving that dispute without recourse to litigation.

In the case at hand, the shareholder was under the shareholders’ agreement required to offer his shares for redemption at the termination of his employment. According to the redemption clause in the shareholders’ agreement, the redemption price was determined by the articles of association of the company. The articles of association, however, only determined the calculation method for the redemption price while other conditions for the redemption were provided for in the shareholders’ agreement. The shareholder and the company failed to agree on the redemption price and the redemption price offered by the company was eventually expressly rejected by the shareholder. The company then, despite the on-going dispute on the redemption price, decided on a “forced/compulsory redemption” (as defined in the Companies Act) of the shares at an extraordinary general meeting of the shareholders.

The key question in the Supreme Court was whether the company’s decision to redeem the shares was invalid on the grounds that the decision was not unanimous, as required by the Finnish Companies Act in a “forced/compulsory redemption” scenario. The company obviously claimed that the shareholder in question, as well as all other shareholders, had given their respective consent to such a “forced/compulsory redemption” by concluding and signing the shareholders’ agreement.

The Supreme Court took a different view. The Supreme Court especially noted that when concluding a shareholders’ agreement, all facts and circumstances of a potential future redemption may not necessarily be known to the shareholders. Therefore, the shareholder must have the possibility to consider whether his consent in the shareholders’ agreement also covers the redemption that has been proposed to the general meeting of shareholders. Also, under general principles and rules that make up company law, the shareholder must have the right to cancel his consent until the final redemption decision has been made by the general meeting of shareholders. Further, the Supreme Court emphasized that the consent of the shareholder must cover the redemption decision as a whole, including the redemption price of the shares. As the shareholder in question had both contested the redemption price and duly informed the company prior to the redemption decision that he will not accept the redemption, the Supreme Court concluded that shareholder had not given the required consent for a “forced/compulsory redemption” as required by the Companies Act.

The precedent clarifies the relationship between a shareholders’ agreement and the articles of association of a company. In practice, a redemption clause in a shareholders’ agreement may not sufficiently guarantee the right of a company to affect a kind of self-enforcement (“forced/compulsory redemption”) under the provisions of the Companies Act. Instead, a potential dispute would in most cases need to be settled through litigation.

However, in avoiding unnecessary recourse to litigation, companies may consider adopting a specific clause in their articles of associations making the share itself subject to redemption. Such clause would in principle make the shares redeemable at the occurrence of a specific event (for example at the termination of employment). Accordingly, based on such clause, the company can forcibly redeem the shares for a specified price on or after the occurrence of the specific event. This can provide flexibility to companies that need to respond to changes in the economic environment and help them to reduce the risks of lengthy disputes.

Should you need any help with evaluating a shareholders’ agreement or updating articles of association of a company in the light of this new precedent, we at Waselius & Wist are at your disposal.

For more information, please contact:

Fredrik Lassenius

Partner

Ida Keränen

Associate

Niklas Thibblin

Managing Partner