Georgia courts require specific performance of certain shareholder agreements

The Georgia Court of Appeals has decided a case involving specific performance of a shareholder agreement that may be important to small and closely held corporations in Georgia.

In Clausen v. Intercat, the Court of Appeals agreed with a trial court order which granted summary judgment to Intercat Inc. for specific performance of a shareholder agreement against three former employees. When the employees were hired, they entered into a contract which required them to sell back any shares they had acquired in Intercat upon termination of their employment. According to the agreement, the price of the shares would be decided as of the date of the close of the quarter prior to the date of termination. In addition, the agreement required the price of the shares to be based on the total “going concern” value of Intercat. The formula used to find this value took into account the book value of the company and the capitalized after tax income. Finally, the value of a share could not be less than $25 for purposes of the agreement.

Intercat faced tough financial times and filed for bankruptcy in 1999. The three employees were terminated between 1999 and 2002; however, none of the employees offered to sell their shares back to Intercat. In 2004, Intercat demanded that the former employees sell their shares back. Intercat determined that the company had a negative value during the dates when the value of the shares were to be calculated, and thus, each employee was offered $25 for each share. Upon the employee’s refusal, Intercat filed suit. Intercat offered the court an affidavit by a partner in a business investigation services firm which concluded that the “going concern” value for deciding the price of a share was in fact negative. The employees failed to submit any evidence to the contrary.

The employees argued that Georgia law allows a court to refuse to order specific performance of a contract if facts can be shown to demonstrate that a contract is unfair or unjust. The employees contended that the court should have taken into account the fair market value of the shares in assessing fairness of the contract. Yet, the employees failed to offer the court any evidence of the fair market value of the stock, and as a result, they did not show that the contract price of $25 per share was unfair or unjust. The court also held that there was nothing unfair or unjust about the buy-sell clause the employees agreed to when they were hired. Consequently, specific performance was proper in this case.

This decision may help companies enforce employment contracts for key employees, especially in tough economic times. Our firm represents both small business, and closely held corporations in employment contract disputes. If your firm has a dispute involving the specific performance of an employment contract, our lawyers may be able to help.

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