Breach Of Fiduciary Duty Shareholder Agreement

If the buy-sell is triggered, at what price do the shares sell? One court has held that a purchase-sale agreement is applicable even if it does not indicate a price, since the parties intend to obtain a reasonable price. However, most buy-sell agreements indicate a price. In other jurisdictions, there is some authority that alleviating the burden on the shareholder and employee to use a purchase and sale contract results in a breach of fiduciary duty. A court found a sufficient fiduciary relationship between the shareholders to justify a revaluation of the purchase price. A court ruled that the purchase price had to be reasonable at the time of purchase. There are two events that participate in a buy-sell: the triggering event and the purchase of shares. Either can be automatic or optional. The triggering event is usually the termination of the employment relationship. In this case, either the shareholder or the company would have the opportunity to trigger the buy-sell by deciding to end the employment relationship.

The company`s ability to terminate may be limited by an employment contract. The triggering event could also be the exercise by both parties of an option unrelated to employment. According to a 1969 California case, Jones V.F. Ahmanson & Co., shareholders do not owe a fiduciary duty to other shareholders or to the company simply because they are shareholders. However, certain circumstances impose a fiduciary duty on a shareholder under California law. While shareholder agreements – especially buy-sell provisions – can provide effective protection for minority shareholders from shareholder oppression, they generally are not. In fact, the most common situation is that the determination of the buy-sell becomes a mechanism of oppression. Let`s take a situation that would be the norm: a shareholders` agreement offers the company the opportunity to buy a shareholder`s shares in the event of termination of an employment relationship at a price set at book value or at another price that may be lower than the fair value of the share.

Shareholders have no other agreement guaranteeing employment. In such a situation, the majority of them would have the power to terminate the minority`s employment relationship for any reason other than crushing the minority shareholder and using the buy-sell to get the minority`s shares at an unfairly low price. . . .