Termination of the share purchase/sale agreement. Review of practice. What could be the consequences?

Sep, 01 2022

Contents:

A share purchase/sale agreement is a document that regulates and makes legal a transaction for the transfer of rights to shares from one entity to another. Situations when in the process of buying / selling, there is a violation of someone’s rights are not uncommon. In this case, the subject may file a claim with the court to terminate the contract of purchase / sale of shares. In this article, we will analyze in detail the essence of the issue, as well as the order of the process.

Reasons for the termination of the purchase / sale of shares

Legal practice shows that before dealing with the termination of the contract of purchase / sale of shares, it is important to pay attention to its drafting even before the transaction. To do this, it is necessary to evaluate the rules prescribed in the company’s charter regarding the sale of shares to third parties. This is important, because if there is a provision on the pre-emptive right of redemption by the company’s shareholders, problems may arise with these persons. A certified refusal of other shareholders from buying securities will help to avoid a court hearing. However, not everyone cares about this document before the deal is concluded. This is fraught with lawsuits from the affected parties, since according to paragraph 5 of Article 7 of the law “On Joint Stock Companies” ignoring the provision on consent to the sale of shares to other persons may entail a requirement to invalidate the transaction.

The second good reason for challenging the purchase/sale agreement may be a violation of the terms of the agreement on payment of the shares received. Such situations can occur both due to the malicious intent of the buyer, and as a result of the incompetence of the authorized person who executed the transaction. As for the latter case, such situations are not as rare as it may seem at first glance. The contract can be drawn up in such a way that the transfer of the right to shares is carried out on the day of signing the agreement, and payment is made within a month. Due to internal problems in the company and corporate conflicts that have arisen, the money may arrive within the specified period, while the shares will be transferred to the buyer’s account. In this case, it is more expedient for the injured party to go to court to terminate the contract of purchase / sale of shares.

Among other significant violations that may lead to the cancellation of the transaction can be identified:

  • Evasion from fulfilling the terms of agreements that are mandatory for this type of transactions in accordance with the legislation of the Russian Federation.
  • Violation of clauses that are essential to a separate contract.
  • Non-compliance with the provisions of the contract, which the parties called the main ones within the framework of a certain agreement.
  • Based on a claim from one of the subjects.

It is important to consider the fact that the concept of “material violation” does not have a clear wording in the Civil Code of the Russian Federation. The Civil Code of the Russian Federation contains such a definition of this concept, which states that such non-fulfillment of the terms of the agreement is recognized as essential, because of which one of the parties suffers significant damage. It turns out that we are talking about both financial losses and the loss of what the subject expected when signing the agreement. Legal practice also shows that the courts, when considering each individual case, assess the materiality of non-fulfillment of the terms of the contract based on documents, testimony, expertise and moral assessment of the situation.

Termination of the share purchase/sale agreement by agreement of the parties

In this case, the termination of the contract implies the desire of either party, which is supported by the second person. A specially executed supplementary agreement signed by two entities will serve as confirmation of the termination of the transaction. This document necessarily contains:

  • Date and place of signing of the supplementary agreement.
  • Personal data and details of the seller and the buyer. In this case, both individuals and legal entities can act as subjects.
  • Description of the reason based on which the agreement is terminated, for example, violation of the clauses of the contract or delay in payment of purchased shares.
  • The date of termination of the share purchase/sale agreement.
  • Signatures of the parties.
  • Powers of subjects. If one of the persons acts based on a power of attorney, then this should be reflected in the document.

Termination of the contract of purchase/sale of shares at the request of the buyer

As a rule, the conditions for termination of the contract on the buyer’s initiative may arise based on the following violations:

  • The seller refuses to transfer ownership of the shares.
  • The seller violates the terms prescribed in the agreement for the transfer of shares to ownership.
  • The seller transferred an incomplete number of shares to the buyer’s account.

If the buyer finds at least one condition that violates the clauses of the signed contract, he must send a pre-trial claim to the legal or registration address of the seller. In the appeal, it is necessary to prescribe the essence of the violations, as well as the requirements put forward. In the latter case, it should be the elimination of violations or a proposal to terminate the agreement. In case of receiving a negative response or violation of the deadlines for responding to the claim from the seller, it is necessary to file a claim with the court.

Termination of the contract of purchase/sale of shares at the request of the seller

The entity that implements the package also has the right to terminate the purchase/sale agreement at its own request. To do this, the following conditions must be met:

  • The acquirer of shares refuses or for certain reasons cannot transfer money to the settlement account within the period specified in the agreement.
  • Payment was made in incomplete volume, if there was no installment clause in the contract.

In order to cancel the agreement on the sale of the promotion, the seller must also send a claim in which it is necessary to set out his requirements in detail. After the expiration of the legal period for receiving a response or a negative decision of the buyer, you can go to court.

Filing a claim for termination of the share purchase/sale agreement

The agreement on the acquisition of shares can be canceled based on clause 2 of Article 450 of the Civil Code of the Russian Federation. However, it is important to know that upon termination of any purchase / sale agreement, compliance with the pre-trial procedure is mandatory.

To peacefully resolve a conflict situation, the parties may not only agree to terminate the agreement, but also to change some of its conditions. For example, this applies to increasing the time for making a payment or methods of transferring funds.

In case of a desire to terminate the contract, this requirement must be clearly formulated in a pre-trial claim with an indication of the reasons for making such a decision. If a claim is written in the text of the claim to fulfill the provisions of the agreement without a clear reference to the termination of the contract, the court recognizes the claim procedure as unfulfilled. When writing a pre-trial claim, it would be correct to offer to terminate the transaction by agreement of the parties.

The claim is sent to the legal address of the company or the place of registration of an individual (unless otherwise specified in the contract). You can send the document by registered mail through the postal service, by e-mail or hand it in person.

According to the law, a 30-day period is given for a response, in case of non-compliance with which the injured party has the right to go to court.

In case of failure to reach a settlement agreement by using the claim procedure for dispute settlement, the statement of claim is filed with the court, depending on the jurisdiction. So, disputes between companies are resolved in the arbitration court of the Russian Federation, if an individual is a participant in the process, then in the magistrate or district court.

It is important to reflect the following in the statement of claim:

  • Full name of the court that will hear the case.
  • Personal data of the plaintiff and the defendant with addresses and phone numbers.
  • Information about the share purchase/sale agreement, which includes the subject, terms of transfer of shares, transaction amount, period, and payment method.
  • The conditions that led to the termination of the transaction unilaterally.
  • Information about the attempt of pre-trial settlement of disputes.
  • The claims put forward in the lawsuit.
  • Legal grounds for making demands for the cancellation of the agreement, namely references to the norms of legislative acts or precedents of judicial practice.

You can send a statement of claim in person at the registry of the court or electronically using an electronic digital signature.

Terms required for termination of the share purchase/sale agreement

With the mutual consent of the parties to cancel the transaction, the drafting and signing of an additional agreement will take several days. In general, this method is considered the fastest, but not in all situations the parties can come to a joint decision.

If the subjects are able to come to a peaceful agreement in the case of using the claim procedure, then it will take about 30 days to terminate the contract. This is the maximum period established by law for responding to a pre-trial claim, unless otherwise provided by the agreement. However, it is important to consider the amount of time.

The trial, as a rule, lasts about two months in the absence of interfering factors. Usually, the extension of time occurs due to compelling circumstances on the part of the plaintiff or the defendant. The decision made by the court comes into force in a month without considering the appeal procedure.

What consequences may occur after the termination of the agreement?

The list of consequences that may occur is contained in Article 453 of the Civil Code of the Russian Federation. These include:

  • Termination of contractual relations from the date of entry into force of a court decision or an additional agreement.
  • One of the parties may accuse the other of unjustified enrichment, provided that the shares are transferred, but not the payment is made.
  • The injured party may file a claim for damages or compensation.
  • Settlement of tax accounting in the company in case of return of previously owned shares.
Author of the article
Termination of the share purchase/sale agreement. Review of practice. What could be the consequences?
Valentina Khlavich
Managing Partner
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