I’ve never thought very hard about the remedy of specific performance. That means ordering a party to a contract to perform its contractual obligations.
But the ability of the Court to order specific performance was front and center in the Business Court’s decision Wednesday in Hilco Transport, Inc. v. Atkins, 2015 NCBC 44. The Defendants, shareholders of the Plaintiff corporation, argued that the Court could not order specific performance compelling them to sell their shares to the corporation.
One of the Hilco shareholders had the right under the Buy-Sell Agreement to require the family members of his brother, upon the brother’s death. to sell their shares to the corporation.
All of the shareholders were subject to the term of a Buy-Sell Agreement which said in Section 10.1 that "[t]he Stockholders and their successors and assigns shall . . . be entitled to specific performance and injunctive relief to enforce the provisions of this Agreement."
The Buy-Sell Agreement did not specifically give the right of specific performance to the corporation.
When the Defendant shareholders received written notice from the corporation stating that it was exercising its option to purchase their shares, they refused to allow the redemption. The corporation sued, demanding specific performance.
The Defendants moved to dismiss, relying on the Latin phrase expressio unius est exclusion alterius. If your fluency in Latin is fading, that means "the expression of one thing is the exclusion of another," (Order Par. 22). Given that Section 10.1 of the Buy-Sell Agreement gave the right of specific performance to the shareholders, without mentioning the corporation, the shareholders contended that the corporation did not have that right.
Judge Gale didn’t buy that argument. He looked at the opening sentence to the paragraph giving the surviving brother the right to buy his deceased brother’s family’s Hilco shares. The Judge found the language "[n]otwithstanding anything contained in this Agreement to the contrary . . . ." to be significant.
I don’t know if I would have viewed that clause as being determinative, but this observation by Judge Gale about the "special rules" for "interpreting stockholder agreements that limit share transfers" is instructive:
‘restrictions on alienation or transfer of stock are not favored and consequently are strictly construed.’ Averitt v. Ledbetter Roofing & Heating Co. v. Phillips, 85 N.C. App. 248, 251, 354 S.E.2d 321, 323 (1987). However, such agreements can be upheld where the language is clear, because ‘[w]hile both option contracts and restrictions on the alienation of property interests are strictly construed, the clear intent of the parties as expressed on the face of the contract controls. Lee v. Scarborough, 164 N.C. App. 357, 360, 595 S.E.2d 729, 732 (2004).
If you think that this ruling means that the Defendants have to tender their shares to the corporation, you are wrong. There are at least a couple of issues yet to be resolved. The Defendants are challenging the valuation of their shares, which the Buy-Sell Agreement said was to be the stock’s fair market value as determined by a specified accountant. There is also a challenge to the validity and enforceability of the Buy-Sell Agreement.