Can a Company Forfeit Shares Due to Missed Drawdown Payment?

Question from Ada, Can a Company Forfeit Shares Due to Missed Drawdown Payment?

Answer from AI:

Understanding the Situation

In this scenario, the company had an EBITDA target of 300 million to be achieved within two years of the second drawdown payment by MLSP, which took place in 2019. The company achieved an EBITDA of 299.96 million, slightly short of the target. Consequently, MLSP did not make the third drawdown payment of 100 million. The managing director issued a share call notice with a 30-day timeline followed by a 3-month timeline, but MLSP still failed to make the payment. The managing director then unilaterally passed a resolution to forfeit MLSP’s shares worth 100 million during a Board of Directors meeting, where two out of three MLSP directors were absent.

Key Legal Considerations

Several legal issues arise from this situation:

1. EBITDA Target and Payment Obligation: The SSA (Share Subscription Agreement) stipulates that the EBITDA target of 300 million must be met for the third drawdown payment to be made. The company fell short by a small margin, achieving 299.96 million. Whether this slight shortfall justifies non-payment can be a matter of interpretation and may require legal scrutiny.
2. Share Forfeiture: The managing director’s decision to forfeit MLSP’s shares raises questions about the legality and fairness of such an action. Share forfeiture is typically governed by the company’s articles of association and relevant corporate laws. It is crucial to determine if the managing director had the authority to unilaterally make this decision.
3. Quorum and Conflict of Interest: The managing director asserted that the presence of the two absent MLSP directors was not required due to conflicts of interest. However, corporate governance rules usually require a quorum for board decisions. The absence of a quorum could render the resolution invalid.

Relevant Laws and Regulations

The following legal principles and regulations may be relevant:

• Corporate Governance: Most jurisdictions have laws governing corporate governance, including the requirement for a quorum in board meetings. For example, the UK Companies Act 2006 outlines the requirements for board meetings and decision-making processes.
• Contract Law: The terms of the SSA are crucial. Contract law principles will determine whether the slight shortfall in EBITDA justifies non-payment and whether the forfeiture of shares is a permissible remedy.
• Conflict of Interest: Directors have fiduciary duties to act in the best interest of the company. If a conflict of interest exists, it must be managed according to the company’s articles of association and relevant laws.

Steps to Take

If you find yourself in a similar situation, consider the following steps:

1. Review the SSA: Carefully examine the terms of the Share Subscription Agreement to understand the obligations and remedies available.
2. Check Corporate Governance Rules: Ensure that the board meeting and resolution comply with the company’s articles of association and relevant corporate governance laws.
3. Seek Legal Advice: Consult with a legal professional to assess the validity of the managing director’s actions and explore potential remedies.
4. Consider Mediation or Arbitration: If there is a dispute, alternative dispute resolution methods like mediation or arbitration may be more efficient than litigation.

When to Consult a Legal Professional

Given the complexity of corporate governance and contract law, it is advisable to seek legal advice to navigate this situation. A legal professional can provide personalized guidance based on the specific facts and applicable laws.

For more information on corporate governance and contract law, you can refer to resources such as the UK Companies Act 2006 and other relevant legal texts.

Remember, this information is for general guidance only and should not be considered legal advice. Always consult with a qualified legal professional for advice tailored to your specific circumstances.