Can a Company Forfeit Shares Due to Unmet EBITDA Targets?

Question from sanam, Can a Company Forfeit Shares Due to Unmet EBITDA Targets?

Answer from AI:

When dealing with complex financial agreements and performance targets, such as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) targets, it’s crucial to understand the legal implications and contractual obligations involved. In this scenario, the company did not meet the EBITDA target of 300 million within the specified two-year period due to the effects of COVID-19, achieving 299.96 million instead. Consequently, the MLSP (Major Lender or Strategic Partner) refused to pay the third installment, leading to a series of actions by the company’s managing director.

Understanding EBITDA Targets and Contractual Obligations

EBITDA targets are often used in financial agreements to measure a company’s performance. These targets can trigger certain obligations or payments when met. In this case, the SSA (Share Subscription Agreement) specifies that the EBITDA target of 300 million must be met within two years from the second drawdown for the MLSP to be required to pay the third installment.

Key Points to Consider:

• Contractual Terms: The exact wording of the SSA is crucial. If the agreement explicitly states that the target must be exactly 300 million, then achieving 299.96 million may not fulfill the condition.
• Force Majeure Clauses: Many contracts include force majeure clauses that can excuse performance due to extraordinary events like COVID-19. Review the SSA to see if such a clause exists and if it applies.
• Notice and Cure Periods: The managing director issued a notice with a three-month timeline. It’s important to check if the SSA allows for any cure periods or remedies in case of near-miss targets.

Actions Taken by the Managing Director

The managing director unilaterally passed a resolution to forfeit MLSP’s share of 100 million, citing that directors are not required to be present in matters of conflict of interest. This raises several legal questions:

Legal Considerations:

1. Authority to Forfeit Shares: The company’s bylaws and the SSA should be reviewed to determine if the managing director has the authority to unilaterally forfeit shares.
2. Conflict of Interest: The managing director’s decision to exclude directors from the resolution due to conflict of interest should be examined for compliance with corporate governance rules.
3. Due Process: Ensure that the process followed for forfeiture complies with the company’s internal policies and relevant laws.

Potential Legal Remedies

If the MLSP believes that the forfeiture was improper, they may have several legal remedies available:

• Negotiation and Mediation: Attempt to resolve the dispute through negotiation or mediation before resorting to litigation.
• Litigation: If negotiation fails, MLSP may file a lawsuit to challenge the forfeiture and seek enforcement of the SSA terms.
• Arbitration: If the SSA includes an arbitration clause, the parties may be required to resolve the dispute through arbitration.

Consulting a Legal Professional

Given the complexity of this situation, it is highly recommended to consult with a legal professional who can provide personalized advice based on the specific terms of the SSA and the applicable laws in the relevant jurisdiction. A lawyer can help interpret the contract, assess the validity of the managing director’s actions, and advise on the best course of action.

For more information on contract law and corporate governance, you can refer to resources such as the [American Bar Association](https://www.americanbar.org/groups/business_law/) or the [Legal Information Institute](https://www.law.cornell.edu/wex/contract).

Remember, this information is intended to provide a general understanding and should not be construed as specific legal advice. Always consult with a qualified legal professional for issues related to your particular situation.