diff --git "a/Legal_Reasoning_Tasks_Examples.json" "b/Legal_Reasoning_Tasks_Examples.json" deleted file mode 100644--- "a/Legal_Reasoning_Tasks_Examples.json" +++ /dev/null @@ -1,1202 +0,0 @@ -{ - "Legal Task #89": { - "Area": "Corporate & M&A", - "Original Version": { - "Prompt": "In 2018, a physical person being the majority shareholder and a director of a non-listed Belgian private limited company (besloten vennootschap) with registered office in Gent, Belgium, sold 15 % of the shares to the general manager (CEO) in charge of the daily management of the company. The CEO performs his management duties as a self-employed person on the basis of a management agreement with the company. In 2020 the majority shareholder entered into a call option agreement entitling the CEO to purchase the remaining 85% of the shares; the price will be determined according to a formula on the basis of the parameters EBIT and net cash flow over the last 2 full accounting years (1 January through 31 December). The agreement provides that the exercise of the call option is conditional on the continued performance of the management agreement at the time of exercise. The performance of the company against these parameters deteriorated significantly and progressively in the last 3 accounting years. The majority shareholder blames this on account of the CEO's inaction in relation to market developments and decisions regarding accounting treatment. The majority shareholder alleges that the CEO thus acted with a view to jeopardising the majority shareholder's interest, engaging in behaviour aimed at lowering the exercise price of the call option. The majority shareholder convinces the board of directors of the company to terminate the management agreement of the CEO. Immediately thereafter, the majority shareholder sues the CEO in a proceeding aimed at (i) the expulsion of the CEO as shareholder of the company and (ii) the dissolution of the call option agreement. The CEO announces that he will countersue to challenge the validity of the termination of his management agreement. \nDoes the majority shareholder have a sound basis to (i) exclude the CEO as shareholder and (ii) obtain the dissolution of the call option agreement; and which judicial instance has competence to resolve these claims ? \nCan the CEO countersue in relation to challenge the validity of the termination of his management agreement before the same court ? \nConsider legal developments under Belgian law up until 31 December 2025. \nFor each conclusion, identify the specific legal provisions, case law of the highest level, or preparatory works that support it.", - "Gold Response": "EXECUTIVE SUMMARY \n1\\. An action for exclusion of the CEO as shareholder is possible pursuant to Articles 2:60 to 2:67 of the Code of Companies and Associations (CCA). For the claimant's case to be viable, he will have to prove serious misconduct of the defendant as a shareholder, causing tension among shareholders jeopardising the company's interest and threatening its continuity. The alleged poor management performance on the part of defendant as such is not sufficient to meet this burden of proof. The prospects of success of the action of exclusion are uncertain. \n2\\. The dissolution of the call option agreement can be obtained in case of serious breach of contractual obligations under that contract. If bad faith amounts to the breach of a contractual obligation under the call option agreement, this could justify the dissolution. The probability of success appears low with respect to this demand, since the alleged poor management performance is not sufficient and there is no evidence of intentional manipulation. \n3\\. The President of the Enterprise Court of Gent has jurisdiction over the action for exclusion of the CEO and the claim for dissolution of the call option agreement. The latter is connected to the action for exclusion on the basis of Article 2:62, §2 or §3 CCA. \n4\\. If the CEO countersues to challenge the termination of the management agreement, the acceptance of a joinder by the President of the Enterprise Court is probable on the basis of Article 2:62, §3 CCA. \n\nANALYSIS \nI. Action for exclusion of the CEO as a shareholder and claim to obtain dissolution of the call option agreement \n1\\. Main legal framework \nTitle 7 of Book 2 of the CCA governs dispute resolution between shareholders of public and private limited companies other than listed limited companies, including actions for exclusion of a shareholder. The procedure for exclusion of a shareholder is specifically regulated in Articles 2:60 to 2:67 CCA and falls within the jurisdiction of the President of the Enterprise Court deciding as if in summary proceedings (Article 2:62, §1 CCA). The objective of such action is to obain a court decision forcing the defendant to transfer his shares to the claimant on the basis of \"well-founded reasons\". It can only be exercised by a claimant who holds shares representing at least 30% of the votes (or profit entitlement rights) attaching to all shares in the company (Article 2:63 CCA). \nThe concept of well-founded reasons is an open norm, which is defined neither in the CCA nor in the Parliamentary Preparations to the CCA (_MvT, wetsontwerp tot invoering van het Wetboek van Vennootschappen en Verenigingen en houdende diverse Bepalingen, Kamer, 2017-2018, 4 juni 2018, nr. 54-3119_). Accordingly, it is for the President of the Enterprise Court to apply this norm, judging at his discretion whether well-founded reasons are present based on the evidence brought forward. According to the jurisprudence of the Belgian Court of Cassation, well-founded reasons must be such that maintaining the presence of the defendant as a shareholder in the company jeopardises the fundamental interests or the continuity of the company (_Cass. 21 maart 2014, Arr. Cass 2014, 848; Parl. St. Senaat 1993-94, nr. 1086, 2, 435_). Contrary to the action of forced exit (Articles 2:68 to 2:69 CCA), jeopardy to the shareholder interests of the claimant as such are not sufficient for exclusion of the defendant. \nThe exclusion action is a subsidiary mechanism, available only as a last resort if no other legal means are available to resolve the issue among stakeholders (_Vandenberghe L., \"De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter\", Financial Law Institute, Ghent University, 2025, p. 4_). \nIf well-founded resasons are established, the President of the Enterprise Court may order the defendant to transfer his shares to the claimant against payment of the price determined by the court (Article 2:67 CCA). An expert is usually appointed to handle the determination of the price. \nIn addition, the majority shareholder seeks to obtain the dissolution of the agreement providing the CEO with a call option to acquire the remaining 85% of the shares of the company. The dissolution of a call option agreement is a matter mainly governed by Book 5 of the Belgian New Civil Code (NCC). In terms of jurisdiction, Articles 2:62, §2 and §3 CCA are relevant to determine whether a joinder to the exclusion action is possible.\n\n2\\. Assessment of the merits of the action for exclusion\nThe claimant holds 85% of the shares (and associated voting rights) of the company; the minimum requirement of a 30% shareholding as required under Article 2:63 CCA is therefore met. \nIn addition, the success of a claim for exclusion pursuant to Article 2:63 CCA requires that the claimant demonstrates well-founded reasons for the exclusion. Examples of well-founded reasons include a lasting and profound disagreement among shareholders paralysing the normal operation of the company, serious breach of duties of a shareholder, abuse of majority or minority powers resulting in violation of the company's interests, etc. \nUnlawful conduct or fault on the part of the defendant are not strictly required, but for well-founded reasons to be established, the continued participation of the defendant as a shareholder must jeopardise the fundamental interests or the continuity of the company. The dispute resolution procedure does not purport to impose a sanction on a shareholder whose behaviour is questioned, but aims at resolving an impasse which threatens the functioning of the company (_Vandenberghe L., \"De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter\", Financial Law Institute, Ghent University, 2025, p. 4_). \nAs a rule, well-founded reasons must relate to obligations of the defendant as a shareholder. Shortcomings and misjudgment in the role of manager are generally not sufficient. In view of the subsidiary character of the action of exclusion, the availabilty of other measures to act against management shortcomings (e.g. a liability claim or contract termination) is an element that weakens the position of the claimant. \nThis being said, the possibility to drive down the exercise price of the call option by management actions directly influencing the company's performance against the defined parameters contributed to the tension between the majority shareholder and the CEO as a shareholder. The case would therefore not be dismissed merely because the defendant's conduct concerns mainly management duties. The defendant is not only a manager but also a shareholde and the disputed behaviour could definitely influence the conditions at which the current percentage of shareholding is increased in the future and thus have an impact on the relations between the shareholders. \nHowever, for the claimant's case to be viable, he will have to prove that the CEO engaged in serious misconduct and that his continued presence as a shareholder jeopardises the company's interest and threatens its continuity. In the case at hand, there are significant elements of uncertainty regarding this burden of proof : \n- uncertainty as to whether or not the CEO's conduct remains within the boundaries of ordinary business judgment (as opposed to serious management fault);\n- availability of alternative measures to act against undesirable management behaviour, including liability claim or termination of the management agreement; \n- absence of the general manager from the main governance body of the company, i.e. the Board of Directors; it is the Board which determines the company's strategy and policy and which is responsible for the supervision of day-to-day management;\n- relatively weak position of the defendant as a shareholder, since 15% of the shares does not constitute a blocking minority;\n- insistence by the majority shareholder that the CEO acted against his interest, whereas the success of the action hinges on demonstrating jeopardy to the company's interest; \n The probability of success of the claim for exclusion therefore seems rather low. \n\n3\\. Assessment of the merits of the majority shareholder's claim to obtain dissolution of the call option agreement \nAccording to Article 5.90 of the Belgian New Civil Code (NCC), a contract with reciprocal obligations can be dissolved in case of contractual breach which is sufficiently serious or if the parties have agreed that a given type of breach warrants dissolution. In case the party seeking dissolution cannot rely on an express dissolution clause included inthe contract (Article 5.92 NCC) or does not wish to proceed to dissolution by giving written notice at his own risk (Article 5.93 NCC), he will have to sue for dissolution in court. \nThe facts of the case do not reveal a serious breach of contractual obligations by the CEO under the call option agreement. However, Article 5.73 NCC in general requires that a contract must be performed in good faith; it also provides that each party must act in accordance with the standard of a prudent and reasonable person placed in the same circumstances and that neither party is allowed to exercise contractual rights in an abusive manner. In order to justify the dissolution of a contract with reference to violation of the duty to act in good faith, the claimant has to establish that the violation of the duty to act in good faith amounts to breach of a contractual obligation and that such breach is of a level of seriousness which justifies dissolution of the contract. \nIn the case at hand, the deterioration of the company's performance against the parameters used in the formula for the determination of the call option excercise price and the fact that such deterioration causes a reduction of this price (i.e. negative management incentive) call for a critical review of the CEO's conduct against the standard of good faith. However, to obtain the dissolution of the call option agreement, the majority shareholder must prove that the alleged inaction of the CEO does not merely constitute substandard management performance or poor business judgment, but is driven by intent to manipulate the call option price. Likewise, the majority shareholder would have to prove that the decisions made by the CEO in respect of accounting treatment are driven by such intent to manipulate. Also, the absence of the general manager from the Board of Directors (being responsible for the company's strategy and policy and for the supervision of day-to-day management) significantly weakens the majority shareholder's case for dissolution of the call option agreement. The probability of success of the claim to obtain dissolution of the management agreement also seems rather low. \n\n4\\. Jurisdictional aspects in relation to the action for exclusion against the CEO as shareholder and claim to obtain dissolution of the call option agreement \n(a) Claim for exclusion \nThe action for exclusion of the CEO must be brought before the President of the Enterprise Court of the registered office of the company, who decides as if in summary proceedings (Article 2:62,§1 CCA). The company must be summoned to appear as a party in the proceedings and informs the other shareholders, if any (Article 2:62,§1 CCA). \n(b) Dissolution of the call option agreement \nThe claim to obtain dissolution of the call option agreement concerns a commercial dispute which is not specifically governed by Title 7 of Book 2 of the CCA. \nHowever, Article 2:62, §2 CCE provides that the President of the Enterprise Court may also decide on any dispute regarding a part or the whole of the ownership rights on the shares of the parties, in sofar as this is necessary for the President's decision on the admissibility of the claim for exclusion. \nMoreover, Article 2:62, §3 CCA provides that the President of the Enterprise Court may adjudicate on any connected disputes relating to the financial relationship between the parties and the company, in particular (but not limited to) disputes regarding loans, current accounts, security interests and non-compete clauses. An additional requirement to establish that the disputes are connected is based on Article 30 of the Belgian Judicial Code, which provides that disputes are connected only if the links between both are so close as to require the joint resolution thereof in order to avoid contradictory solutions. \nArticles 2:62, §2 and §3 CCA expand the basic rule of jurisdictional competence; in principle, they should be interpreted in a restrictive manner. However, a more flexible interpretation appears to be in line with legislative intent for reasons of efficiency of the conduct of court proceedings (\"proceseconomie\") (_Vandenberghe L., \"De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter\", Financial Law Institute, Ghent University, 2025, p. 6; Memorie van Toelichting, wetsontwerp tot invoering van het Wetboek van Vennootschappen en Verenigingen en houdende diverse bepalingen, KAMER, 2017-2018, 4 juni 2018, nr. 54-3119/001, 76_).\nIt is uncertain whether the resolution of the dispute regarding the call option agreement is necessary for the initial decision on the admissibility of the claim for exclusion as meant in Article 2:62, §2 CCA. However, the call option agreement relates to the (future) financial relationship between the parties and the company, since the exercise of the call option will determine the shareholding of each shareholder in the company (including entitlement to profits). In addition, a different outcome of, one the one hand, the action for exclusion of the CEO in relation to his current 15% shareholding and, on the other hand, the right to obtain additional shares (85%) pursuant to the call option agreement, would not be compatible with the principle of efficiency of the conduct of court proceedings (\"proceseconomie\"). It is therefore a connected dispute for purposes of Article 2:62, §3 CCA and falls within the competence of the President of the Enterprise Court resolving on the action for exclusion of the CEO. \n\nII. Jurisdictional aspects with respect to the CEO's recourse against termination of the management agreement \nThe issue at stake is whether, upon initiation of the law suit of the majority shareholder for exclusion of the CEO and dissolution of the call option agreement, the CEO can countersue in the same proceedings before the President of the Enterprise Court with a view to overturning the termination of the management agreement .\nThe CEO has a clear interest in overturning the termination of the management agreement, since the right to exercise the call option is conditional on the continued performance of the management agreement at the time of exercise of the call option. Indeed, in case the President of the Enterprise Court were to reject the dissolution of the call option agreement requested by the majority shareholder, the CEO would still forfeit the benefit of the call option in case of lawful termination of the management agreement. \nFor the President of the Enterprise Court to accept a joinder of the CEO's countersuit to the majority shareholder's action for exclusion of the CEO, it has to be established that the disputes are connected. There is no connection in the sense of Article 2:62, §2 CCA, since the dispute on the termination of the management agreement is not a dispute with respect to the ownership of the sahres. In addition, the dispute on the termination of the management agreement does not directly concern the financial relationship between the company and a shareholder as meant in Article 2:62, §3 CCA, since the lawsuit seeks to invalidate the termination of the management agreement as opposed to a claim for financial compensation. \nNevertheless, It can be argued with good reason that this is a connected dispute in the meaning of Article 2:62, §3 CCA, since the right to exercise the call option and acquire additional shares is conditional on the continued performance of the management agreement at the time of exercise of the option. Just as the claim to obtain the dissolution of the call option agreement is connected to the action for exclusion because the former concerns the financial relationship between the parties and the company (cf. section I.4.(b) above), the counterclaim seeking to invalidate the termination of the management agreement is connected because the invalidation will ensure that the call option can still be exercised and additional share can be acquired. Notwithstanding the fact that the CEO is not suing the company for direct financial compensation in relation to termination of the management agreement, the right to exercise the call option (requiring the continuation of the call option agreement) and acquire shares in the company constitutes a financial relationship between the company and the parties as mentioned in Article 2:62, §3 CCA. \nIn conclusion, the President of the Entreprise Court of Gent is likely to take jurisdiction over the countersuit.", - "Associated Rubrics": 32, - "Rubrics": [ - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "The executive summary correctly tracks the separate questions raised in the prompt ", - "justification": "The summary must provide a direct and quick response to the issues at stake " - }, - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "The analysis of jurisdiction in relation to the connected disputes clearly outlines the consecutive steps in reasoning ", - "justification": "This is core to the judicial strategy to be adopted by the claimant's and defendant's counsel " - }, - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "The conclusions in the executive summary can be traced to the conclusions in each section of the analysis ", - "justification": "The summary must provide a direct and quick response to the issues at stake " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "5", - "criterion": "The President of the Enterpise Court of Gent has jurisdiction over the countersuit of the CEO with respect to the termination of the management agreement ", - "justification": "Article 2:62,§ 3 CCA and doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "3", - "criterion": "Territorial jurisdiction is with the Enterprise Court of Gent ", - "justification": "The registered office of the company is located in Gent, Belgium" - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "1", - "criterion": "action for exclusion is possible for a private limited company (besloten vennootschap) ", - "justification": "Scope of Article 2:60 CCA is limited to private and public limited companies " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "1", - "criterion": "expulsion of a shareholder can be obtained via the dispute resolution of Title 7 Book 2 of the CCA ", - "justification": "Framework for exclusion is set forth in Articles 2:60 to 2:67 CCA " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "-3", - "criterion": "The memorandum fails to reference case law at the level of the Cour de Cassation for purposes of defining well-founded reasons. ", - "justification": "Cass. 21 maart 2014, Arr. Cass 2014, 848" - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "3", - "criterion": "The requirement of proces economie (efficiency of the conduct of court proceedings) is referenced in the argument whether the dispute regarding the call option agreement is connected to the action for exclusion as such ", - "justification": "This requirement is stated in doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "1", - "criterion": "It is recognised that the CEO is not an employee of the company", - "justification": "Information provided in the prompt and necessary for the analysis of jurisdiction " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "The argument for the joinder of the countersuit with respect to the termination of the management to the action for exclusion is based on Article 2:62, § 3 CCA ", - "justification": "Article 2:62, §3 CCA allows the joinder with respect to disputes in relation to the financial relations between the parties and the company. Since the continuation of the management agreement is a condition for the validity of the right to exercise the call option and acquire additional shares, it concerns such financial relationship " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "It is recognised that the absence of the CEO from the Board of Directors of the company is an important factor for resolving the dispute with respect to exclusion as a shareholder ", - "justification": "This element is mentioned in the prompt and is part of the legal reasoning on similar cases in doctrine (doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "Well founded reasons is characterised as an open norm, to be filled in by the judge", - "justification": "Principle established in the Preparatory Works to the CCA (MvT, wetsontwerp tot invoering van het Wetboek van Vennootschappen en Verenigingen en houdende diverse Bepalingen, Kamer, 2017-2018, 4 juni 2018, nr. 54-3119)" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "The action for exclusion is characterised as a subsidiary mechanism to resolve disputes with respect to stakeholders in companies ", - "justification": "Principle established in doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "In order for management conduct to support a claim for exclusion of a shareholder, substandard business judgment is not sufficient ", - "justification": "Principle established in doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "To obtain the dissolution of the call option agreement, it is argued that there has been a violation of the duty to act in good faith ", - "justification": "Article 5.73 New Civil Code" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "The argument for the joinder of the action related to the dissolution of the call option agreement is stronger based on Article 2:62, § 3 CCA ", - "justification": "Article 2:62, § 3 CCA, which does not contain the requirement that the resolution of the dispute is necessary for the initial decision on the admissibility of the claim for exclusion as meant in Article 2:62, § 2 CCA" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "It is recognised that the CEO must countersue for the invalidation of the termination of the management agreement in order to secure his rights under the call option agreement ", - "justification": "The right to exercise the call option is conditional on continued performance of the management agreement as stated in the prompt" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "With respect to the issue of connectedness of the countersuit of the CEO to the action for exclusion, is recognised that the fact that the CEO is not suing for financial compensation for the termination of the management agreement is a relevant factor ", - "justification": "This element is mentioned in the prompt and is part of the legal reasoning on similar cases in doctrine (doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "The substantive requirement of well-founded reasons (or lawful grounds) in an action for exclusion is fundamentally linked to the company's interest ", - "justification": "Principle established in the Preparatory Works to the CCA and in jurisprudence (Cass. 21 maart 2014, Arr. Cass 2014, 848; Parl. St. Senaat 1993-94, nr. 1086, 2, 435)" - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "Well founded reasons must relate to obligations of the defendant as a shareholder", - "justification": "Principle established in the Preparatory Works to the CCA and in doctrine (Parl. St. Senaat 1993-94, nr. 1086, 2, 435; Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025" - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "The jurisdiction of the President of the Enterprise Court over exclusion actions is as in summary proceedings", - "justification": "Article 2:61, § CCA" - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "The joinder of the disputes related to the action for exclusion is possible under Articles 2:62, §2 and 2:63, §3 CCA ", - "justification": "Articles 2:62, §2 or 2:63, §3 CCA " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "The argument pertaining to the duty to act in good faith references Article 5.73 of the New Civil Code ", - "justification": "Article 5.73 New Civil Code expands on the duty to act in good faith " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "The analysis of the requirement of well-founded reasons references the Jurisprudence of the Belgian Court of Cassation ", - "justification": "Cass. 21 maart 2014, Arr. Cass 2014 " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "The analysis of the requirement of well-founded reasons references the Preparatory Works to the companies legislation ", - "justification": "Parl. St. Senaat 1993-94, nr. 1086, 2, 435" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "3", - "criterion": "Article 30 of the Belgian Judicial Code is referenced in the argument whether the dispute regarding the call option agreement is connected to the action for exclusion as such ", - "justification": "Article 30 of the Belgian Judicial Code and doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "1", - "criterion": "The claim to obtain dissolution of the call option agreement is possible pursuant to Article 5.93 New Civil Code ", - "justification": "Article 5.93 New Civil Code" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "1", - "criterion": "References to provisions of the Belgian Civil Code are to the New Civil Code ", - "justification": "The previous version of the Civil Code was superseded by a new version" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "The memorandum fails to state that, as a fundamental condition for being able to bring the action for exclusion, the claimant must own shares representing at least 30% of the votes or profit entitlement rights attaching to all shares of the company ", - "justification": "Requirement in Article 2:63 CCA " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "The memorandum fails to state that, as a procedural requirement, the claimant must also summon the company to appear in the proceedings ", - "justification": "Requirement in Article 2:62, §1 CCA " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "The memorandum fails to state that, with respect to the action for exclusion, material jurisdiction is with the President of the Enterprise Court ", - "justification": "Requirement in Article 2:62, § 1 CCA" - } - ], - "Task Details": "This is a realistic legal scenario under Belgian company law, several elements of which are encountered in practice. \nTo complete this task, one has to classify the case as a conflict situation under the Belgian Code of Companies and combine this with the analysis of jurisdictional issues, in particular as regards the possibility to have the main case (exclusion of a shareholder from the company) combined with the issues of dissolution of the call option agreement and termination of the management agreement.", - "Reference Materials": "Belgian Code of Companies (CCA) \nBelgian Judicial Code\nPreparatory Works to the CCA\nThe term private limited company is used here to refer to a \"besloten vennootschap\" \nThe term registered office refers to \"maatschappelijke zetel\"", - "Realistic Task": 4, - "Realistic Explanation": "The case is representative of legal work as it relates to a scenario frequently put in place to organise succession and take-over in Belgian companies.", - "Difficult Task": 4, - "Difficulty Explanation": "The case is tricky because it concerns both the relationship among shareholders and, as regards the performance of the management agreement, the relationship between the company and an executive of the company. Among the elements of difficulty is to determine whether the recourse of exclusion under the Belgian Code of Companies can also be based on the latter relationship. \nThe reasoning requires several steps also in relation to jurisdictional competence, since it mixes the issue of fundamental trust among shareholders with the issue of purely pecuniary claims between stakeholders in the company" - }, - "Version 1": { - "Prompt": "The president of the board of directors of a non-listed Belgian private limited company (besloten vennootschap) with registered office in Gent, Belgium, wishes to obtain a concise assessment of a dispute situation that has arisen among shareholders. The president is an independent director who, at this stage, is not taking sides with one or the other of the parties involved in the dispute. At this stage, the focus is on understanding the legal framework applicable to the dispute rather than on settlement or full litigation strategy. \nThe facts of the dispute are as follows. \nIn 2018, a physical person being the majority shareholder and a director of the company concerned, sold 15 % of the shares to the general manager (CEO) in charge of the daily management of the company. No contractual veto rights are attaching to the CEO's shares. The CEO performs his management duties as a self-employed person on the basis of a management agreement with the company. In 2020 the majority shareholder entered into a call option agreement entitling the CEO to purchase the remaining 85% of the shares; the price will be determined according to a formula on the basis of the parameters EBIT and net cash flow over the last 2 full accounting years (1 January through 31 December). The agreement provides that the exercise of the call option is conditional on the continued performance of the management agreement at the time of exercise. The performance of the company against these parameters deteriorated significantly and progressively in the last 3 accounting years. The majority shareholder blames this on account of the CEO's inaction in relation to market developments and decisions regarding accounting treatment. The majority shareholder alleges that the CEO thus acted with a view to jeopardising the majority shareholder's interest, engaging in behaviour aimed at lowering the exercise price of the call option. The majority shareholder convinces the board of directors of the company to terminate the management agreement of the CEO. Immediately thereafter, the majority shareholder sues the CEO in a proceeding aimed at (i) the expulsion of the CEO as shareholder of the company on the basis of misconduct and (ii) the dissolution of the call option agreement. The CEO announces that he will countersue to challenge the validity of the termination of his management agreement. \nThe president of the board of directors needs an assessment regarding the following questions. \nDoes the majority shareholder have a sound basis to (i) exclude the CEO as shareholder and (ii) obtain the dissolution of the call option agreement; and which judicial instance has competence to resolve these claims ? \nCan the CEO countersue in relation to challenge the validity of the termination of his management agreement before the same court ? \nConsider legal developments under Belgian law up until 31 December 2025. \nLeading up to each conclusion of the analysis, identify the specific legal provisions, (publicly available) case law of the highest level, or preparatory works that support it. Where useful, add references to (publicly available) recent doctrine relevant to the specific case at hand. \nProvide a concise executive summary.", - "Gold Response": "EXECUTIVE SUMMARY \n1\\. An action for exclusion of the CEO as shareholder is possible pursuant to Articles 2:60 to 2:67 of the Code of Companies and Associations (CCA). For the claimant's case to be viable, he will have to prove serious misconduct of the defendant as a shareholder, causing tension among shareholders jeopardising the company's interest and threatening its continuity. The alleged poor management performance on the part of defendant as such is not sufficient to meet this burden of proof. The prospects of success of the action of exclusion are uncertain. \n2\\. The dissolution of the call option agreement can be obtained in case of serious breach of contractual obligations under that contract. If bad faith amounts to the breach of a contractual obligation under the call option agreement, this could justify the dissolution. The probability of success appears low with respect to this demand, since the alleged poor management performance is not sufficient and there is no evidence of intentional manipulation. \n3\\. The President of the Enterprise Court of Gent has jurisdiction over the action for exclusion of the CEO and the claim for dissolution of the call option agreement. The latter is connected to the action for exclusion on the basis of Article 2:62, §2 or §3 CCA. \n4\\. If the CEO countersues to challenge the termination of the management agreement, the acceptance of a joinder by the President of the Enterprise Court is probable on the basis of Article 2:62, §3 CCA. \n\nANALYSIS \nI. Action for exclusion of the CEO as a shareholder and claim to obtain dissolution of the call option agreement \n1\\. Main legal framework \nTitle 7 of Book 2 of the CCA governs dispute resolution between shareholders of public and private limited companies other than listed limited companies, including actions for exclusion of a shareholder. The procedure for exclusion of a shareholder is specifically regulated in Articles 2:60 to 2:67 CCA and falls within the jurisdiction of the President of the Enterprise Court deciding as if in summary proceedings (Article 2:62, §1 CCA). The objective of such action is to obain a court decision forcing the defendant to transfer his shares to the claimant on the basis of \"well-founded reasons\". It can only be exercised by a claimant who holds shares representing at least 30% of the votes (or profit entitlement rights) attaching to all shares in the company (Article 2:63 CCA). \nThe concept of well-founded reasons is an open norm, which is defined neither in the CCA nor in the Parliamentary Preparations to the CCA (_MvT, wetsontwerp tot invoering van het Wetboek van Vennootschappen en Verenigingen en houdende diverse Bepalingen, Kamer, 2017-2018, 4 juni 2018, nr. 54-3119_). Accordingly, it is for the President of the Enterprise Court to apply this norm, judging at his discretion whether well-founded reasons are present based on the evidence brought forward. According to the jurisprudence of the Belgian Court of Cassation, well-founded reasons must be such that maintaining the presence of the defendant as a shareholder in the company jeopardises the fundamental interests or the continuity of the company (_Cass. 21 maart 2014, Arr. Cass 2014, 848; Parl. St. Senaat 1993-94, nr. 1086, 2, 435_). Contrary to the action of forced exit (Articles 2:68 to 2:69 CCA), jeopardy to the shareholder interests of the claimant as such are not sufficient for exclusion of the defendant. \nThe exclusion action is a subsidiary mechanism, available only as a last resort if no other legal means are available to resolve the issue among stakeholders (_Vandenberghe L., \"De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter\", Financial Law Institute, Ghent University, 2025, p. 4_). \nIf well-founded resasons are established, the President of the Enterprise Court may order the defendant to transfer his shares to the claimant against payment of the price determined by the court (Article 2:67 CCA). An expert is usually appointed to handle the determination of the price. \nIn addition, the majority shareholder seeks to obtain the dissolution of the agreement providing the CEO with a call option to acquire the remaining 85% of the shares of the company. The dissolution of a call option agreement is a matter mainly governed by Book 5 of the Belgian New Civil Code (NCC). In terms of jurisdiction, Articles 2:62, §2 and §3 CCA are relevant to determine whether a joinder to the exclusion action is possible.\n\n2\\. Assessment of the merits of the action for exclusion\nThe claimant holds 85% of the shares (and associated voting rights) of the company; the minimum requirement of a 30% shareholding as required under Article 2:63 CCA is therefore met. \nIn addition, the success of a claim for exclusion pursuant to Article 2:63 CCA requires that the claimant demonstrates well-founded reasons for the exclusion. Examples of well-founded reasons include a lasting and profound disagreement among shareholders paralysing the normal operation of the company, serious breach of duties of a shareholder, abuse of majority or minority powers resulting in violation of the company's interests, etc. (see also (_Cass. 21 maart 2014, Arr. Cass 2014, 848)_. In the case at hand, there is no situation of structural shareholder deadlock, since the CEO currently owns only 15% of the shares which does not amount to a blocking minority (whether under contract or at law). The argument of the majority shareholder needs to focus on trust breakdown linked to the conduct of the CEO as a shareholder or misconduct.\nUnlawful conduct or fault on the part of the defendant are not strictly required, but for well-founded reasons to be established, the continued participation of the defendant as a shareholder must jeopardise the fundamental interests or the continuity of the company. As is also mentioned in doctrine, the dispute resolution procedure does not purport to impose a sanction on a shareholder whose behaviour is questioned, but aims at resolving an impasse which threatens the functioning of the company (for a doctrinal comment on a similar set of facts, see _Vandenberghe L., \"De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter\", Financial Law Institute, Ghent University, 2025, p. 4_). \nAs a rule, well-founded reasons must relate to obligations of the defendant as a shareholder. Shortcomings and misjudgment in the role of manager are generally not sufficient. In view of the subsidiary character of the action of exclusion, the availabilty of other measures to act against management shortcomings (e.g. a liability claim or contract termination) is an element that weakens the position of the claimant. \nThis being said, the possibility to drive down the exercise price of the call option by management actions directly influencing the company's performance against the defined parameters contributed to the tension between the majority shareholder and the CEO as a shareholder. The case would therefore not be dismissed merely because the defendant's conduct concerns mainly management duties. The defendant is not only a manager but also a shareholder and the disputed behaviour could definitely influence the conditions at which the current percentage of shareholding is increased in the future and thus have an impact on the relations between the shareholders. \nHowever, for the claimant's case to be viable, he will have to prove that the CEO caused the breakdown of shareholder trust based on his conduct or engaged in serious misconduct and that his continued presence as a shareholder jeopardises the company's interest and threatens its continuity. In the case at hand, there are significant elements of uncertainty regarding this burden of proof : \n- uncertainty as to whether or not the CEO's conduct remains within the boundaries of ordinary business judgment (as opposed to serious management fault);\n- availability of alternative measures to act against undesirable management behaviour, including liability claim or termination of the management agreement; \n- absence of the general manager from the main governance body of the company, i.e. the Board of Directors; it is the Board which determines the company's strategy and policy and which is responsible for the supervision of day-to-day management;\n- relatively weak position of the defendant as a shareholder, since 15% of the shares does not constitute a blocking minority;\n- insistence by the majority shareholder that the CEO acted against his interest, whereas the success of the action hinges on demonstrating jeopardy to the company's interest; \n The probability of success of the claim for exclusion therefore seems rather low. \n\n3\\. Assessment of the merits of the majority shareholder's claim to obtain dissolution of the call option agreement \nAccording to Article 5.90 of the Belgian New Civil Code (NCC), a contract with reciprocal obligations can be dissolved in case of contractual breach which is sufficiently serious or if the parties have agreed that a given type of breach warrants dissolution. In case the party seeking dissolution cannot rely on an express dissolution clause included inthe contract (Article 5.92 NCC) or does not wish to proceed to dissolution by giving written notice at his own risk (Article 5.93 NCC), he will have to sue for dissolution in court. \nThe facts of the case do not reveal a serious breach of contractual obligations by the CEO under the call option agreement. However, Article 5.73 NCC in general requires that a contract must be performed in good faith; it also provides that each party must act in accordance with the standard of a prudent and reasonable person placed in the same circumstances and that neither party is allowed to exercise contractual rights in an abusive manner. In order to justify the dissolution of a contract with reference to violation of the duty to act in good faith, the claimant has to establish that the violation of the duty to act in good faith amounts to breach of a contractual obligation and that such breach is of a level of seriousness which justifies dissolution of the contract. \nIn the case at hand, the deterioration of the company's performance against the parameters used in the formula for the determination of the call option excercise price and the fact that such deterioration causes a reduction of this price (i.e. negative management incentive) call for a critical review of the CEO's conduct against the standard of good faith. However, to obtain the dissolution of the call option agreement, the majority shareholder must prove that the alleged inaction of the CEO does not merely constitute substandard management performance or poor business judgment, but is driven by intent to manipulate the call option price. Likewise, the majority shareholder would have to prove that the decisions made by the CEO in respect of accounting treatment are driven by such intent to manipulate. Also, the absence of the general manager from the Board of Directors (being responsible for the company's strategy and policy and for the supervision of day-to-day management) significantly weakens the majority shareholder's case for dissolution of the call option agreement. The probability of success of the claim to obtain dissolution of the management agreement also seems rather low. \n\n4\\. Jurisdictional aspects in relation to the action for exclusion against the CEO as shareholder and claim to obtain dissolution of the call option agreement \n(a) Claim for exclusion \nThe action for exclusion of the CEO must be brought before the President of the Enterprise Court of the registered office of the company, who decides as if in summary proceedings (Article 2:62,§1 CCA). The company must be summoned to appear as a party in the proceedings and informs the other shareholders, if any (Article 2:62,§1 CCA). \n(b) Dissolution of the call option agreement \nThe claim to obtain dissolution of the call option agreement concerns a commercial dispute which is not specifically governed by Title 7 of Book 2 of the CCA. \nHowever, Article 2:62, §2 CCE provides that the President of the Enterprise Court may also decide on any dispute regarding a part or the whole of the ownership rights on the shares of the parties, in sofar as this is necessary for the President's decision on the admissibility of the claim for exclusion. \nMoreover, Article 2:62, §3 CCA provides that the President of the Enterprise Court may adjudicate on any connected disputes relating to the financial relationship between the parties and the company, in particular (but not limited to) disputes regarding loans, current accounts, security interests and non-compete clauses. An additional requirement to establish that the disputes are connected is based on Article 30 of the Belgian Judicial Code, which provides that disputes are connected only if the links between both are so close as to require the joint resolution thereof in order to avoid contradictory solutions. \nArticles 2:62, §2 and §3 CCA expand the basic rule of jurisdictional competence; in principle, they should be interpreted in a restrictive manner. However, a more flexible interpretation appears to be in line with legislative intent for reasons of efficiency of the conduct of court proceedings (\"proceseconomie\") (_Vandenberghe L., \"De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter\", Financial Law Institute, Ghent University, 2025, p. 6; Memorie van Toelichting, wetsontwerp tot invoering van het Wetboek van Vennootschappen en Verenigingen en houdende diverse bepalingen, KAMER, 2017-2018, 4 juni 2018, nr. 54-3119/001, 76_).\nIt is uncertain whether the resolution of the dispute regarding the call option agreement is necessary for the initial decision on the admissibility of the claim for exclusion as meant in Article 2:62, §2 CCA. However, the call option agreement relates to the (future) financial relationship between the parties and the company, since the exercise of the call option will determine the shareholding of each shareholder in the company (including entitlement to profits). In addition, a different outcome of, one the one hand, the action for exclusion of the CEO in relation to his current 15% shareholding and, on the other hand, the right to obtain additional shares (85%) pursuant to the call option agreement, would not be compatible with the principle of efficiency of the conduct of court proceedings (\"proceseconomie\"). It is therefore a connected dispute for purposes of Article 2:62, §3 CCA and falls within the competence of the President of the Enterprise Court resolving on the action for exclusion of the CEO. \n\nII. Jurisdictional aspects with respect to the CEO's recourse against termination of the management agreement \nThe issue at stake is whether, upon initiation of the law suit of the majority shareholder for exclusion of the CEO and dissolution of the call option agreement, the CEO can countersue in the same proceedings before the President of the Enterprise Court with a view to overturning the termination of the management agreement .\nThe CEO has a clear interest in overturning the termination of the management agreement, since the right to exercise the call option is conditional on the continued performance of the management agreement at the time of exercise of the call option. Indeed, in case the President of the Enterprise Court were to reject the dissolution of the call option agreement requested by the majority shareholder, the CEO would still forfeit the benefit of the call option in case of lawful termination of the management agreement. \nFor the President of the Enterprise Court to accept a joinder of the CEO's countersuit to the majority shareholder's action for exclusion of the CEO, it has to be established that the disputes are connected. There is no connection in the sense of Article 2:62, §2 CCA, since the dispute on the termination of the management agreement is not a dispute with respect to the ownership of the sahres. In addition, the dispute on the termination of the management agreement does not directly concern the financial relationship between the company and a shareholder as meant in Article 2:62, §3 CCA, since the lawsuit seeks to invalidate the termination of the management agreement as opposed to a claim for financial compensation. \nNevertheless, It can be argued with good reason that this is a connected dispute in the meaning of Article 2:62, §3 CCA, since the right to exercise the call option and acquire additional shares is conditional on the continued performance of the management agreement at the time of exercise of the option. Just as the claim to obtain the dissolution of the call option agreement is connected to the action for exclusion because the former concerns the financial relationship between the parties and the company (cf. section I.4.(b) above), the counterclaim seeking to invalidate the termination of the management agreement is connected because the invalidation will ensure that the call option can still be exercised and additional share can be acquired. Notwithstanding the fact that the CEO is not suing the company for direct financial compensation in relation to termination of the management agreement, the right to exercise the call option (requiring the continuation of the call option agreement) and acquire shares in the company constitutes a financial relationship between the company and the parties as mentioned in Article 2:62, §3 CCA. \nIn conclusion, the President of the Entreprise Court of Gent is likely to take jurisdiction over the countersuit.", - "Associated Rubrics": 32, - "Rubrics": [ - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "The conclusions in the executive summary can be traced to the conclusions in each section of the analysis ", - "justification": "The summary must provide a direct and quick response to the issues at stake " - }, - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "The analysis of jurisdiction in relation to the connected disputes clearly outlines the consecutive steps in reasoning ", - "justification": "This is core to the judicial strategy to be adopted by the claimant's and defendant's counsel " - }, - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "The executive summary correctly tracks the separate questions raised in the prompt ", - "justification": "The summary must provide a direct and quick response to the issues at stake " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "5", - "criterion": "The President of the Enterpise Court of Gent has jurisdiction over the countersuit of the CEO with respect to the termination of the management agreement ", - "justification": "Article 2:62,§ 3 CCA and doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "3", - "criterion": "Territorial jurisdiction is with the Enterprise Court of Gent ", - "justification": "The registered office of the company is located in Gent, Belgium" - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "1", - "criterion": "expulsion of a shareholder can be obtained via the dispute resolution of Title 7 Book 2 of the CCA ", - "justification": "Framework for exclusion is set forth in Articles 2:60 to 2:67 CCA " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "1", - "criterion": "action for exclusion is possible for a private limited company (besloten vennootschap) ", - "justification": "Scope of Article 2:60 CCA is limited to private and public limited companies " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "-3", - "criterion": "The memorandum fails to reference case law at the level of the Cour de Cassation for purposes of defining well-founded reasons. ", - "justification": "Cass. 21 maart 2014, Arr. Cass 2014, 848" - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "3", - "criterion": "The requirement of proces economie (efficiency of the conduct of court proceedings) is referenced in the argument whether the dispute regarding the call option agreement is connected to the action for exclusion as such ", - "justification": "This requirement is stated in doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "1", - "criterion": "It is recognised that the CEO is not an employee of the company", - "justification": "Information provided in the prompt and necessary for the analysis of jurisdiction " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "The argument for the joinder of the countersuit with respect to the termination of the management to the action for exclusion is based on Article 2:62, § 3 CCA ", - "justification": "Article 2:62, §3 CCA allows the joinder with respect to disputes in relation to the financial relations between the parties and the company. Since the continuation of the management agreement is a condition for the validity of the right to exercise the call option and acquire additional shares, it concerns such financial relationship " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "It is recognised that the absence of the CEO from the Board of Directors of the company is an important factor for resolving the dispute with respect to exclusion as a shareholder ", - "justification": "This element is mentioned in the prompt and is part of the legal reasoning on similar cases in doctrine (doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "Well founded reasons is characterised as an open norm, to be filled in by the judge", - "justification": "Principle established in the Preparatory Works to the CCA (MvT, wetsontwerp tot invoering van het Wetboek van Vennootschappen en Verenigingen en houdende diverse Bepalingen, Kamer, 2017-2018, 4 juni 2018, nr. 54-3119)" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "The action for exclusion is characterised as a subsidiary mechanism to resolve disputes with respect to stakeholders in companies ", - "justification": "Principle established in doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "In order for management conduct to support a claim for exclusion of a shareholder, substandard business judgment is not sufficient ", - "justification": "Principle established in doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "To obtain the dissolution of the call option agreement, it is argued that there has been a violation of the duty to act in good faith ", - "justification": "Article 5.73 New Civil Code" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "It is recognised that the CEO must countersue for the invalidation of the termination of the management agreement in order to secure his rights under the call option agreement ", - "justification": "The right to exercise the call option is conditional on continued performance of the management agreement as stated in the prompt" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "The argument for the joinder of the action related to the dissolution of the call option agreement is stronger based on Article 2:62, § 3 CCA ", - "justification": "Article 2:62, § 3 CCA, which does not contain the requirement that the resolution of the dispute is necessary for the initial decision on the admissibility of the claim for exclusion as meant in Article 2:62, § 2 CCA" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "With respect to the issue of connectedness of the countersuit of the CEO to the action for exclusion, is recognised that the fact that the CEO is not suing for financial compensation for the termination of the management agreement is a relevant factor ", - "justification": "This element is mentioned in the prompt and is part of the legal reasoning on similar cases in doctrine (doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "The substantive requirement of well-founded reasons (or lawful grounds) in an action for exclusion is fundamentally linked to the company's interest ", - "justification": "Principle established in the Preparatory Works to the CCA and in jurisprudence (Cass. 21 maart 2014, Arr. Cass 2014, 848; Parl. St. Senaat 1993-94, nr. 1086, 2, 435)" - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "The jurisdiction of the President of the Enterprise Court over exclusion actions is as in summary proceedings", - "justification": "Article 2:61, § CCA" - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "The joinder of the disputes related to the action for exclusion is possible under Articles 2:62, §2 and 2:63, §3 CCA ", - "justification": "Articles 2:62, §2 or 2:63, §3 CCA " - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "Well founded reasons must relate to obligations of the defendant as a shareholder", - "justification": "Principle established in the Preparatory Works to the CCA and in doctrine (Parl. St. Senaat 1993-94, nr. 1086, 2, 435; Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "The argument pertaining to the duty to act in good faith references Article 5.73 of the New Civil Code ", - "justification": "Article 5.73 New Civil Code expands on the duty to act in good faith " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "The analysis of the requirement of well-founded reasons references the Preparatory Works to the companies legislation ", - "justification": "Parl. St. Senaat 1993-94, nr. 1086, 2, 435" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "The analysis of the requirement of well-founded reasons references the Jurisprudence of the Belgian Court of Cassation ", - "justification": "Cass. 21 maart 2014, Arr. Cass 2014 " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "3", - "criterion": "Article 30 of the Belgian Judicial Code is referenced in the argument whether the dispute regarding the call option agreement is connected to the action for exclusion as such ", - "justification": "Article 30 of the Belgian Judicial Code and doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "1", - "criterion": "The claim to obtain dissolution of the call option agreement is possible pursuant to Article 5.93 New Civil Code ", - "justification": "Article 5.93 New Civil Code" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "1", - "criterion": "References to provisions of the Belgian Civil Code are to the New Civil Code ", - "justification": "The previous version of the Civil Code was superseded by a new version" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "The memorandum fails to state that, as a fundamental condition for being able to bring the action for exclusion, the claimant must own shares representing at least 30% of the votes or profit entitlement rights attaching to all shares of the company ", - "justification": "Requirement in Article 2:63 CCA " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "The memorandum fails to state that, as a procedural requirement, the claimant must also summon the company to appear in the proceedings ", - "justification": "Requirement in Article 2:62, §1 CCA " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "The memorandum fails to state that, with respect to the action for exclusion, material jurisdiction is with the President of the Enterprise Court ", - "justification": "Requirement in Article 2:62, § 1 CCA" - } - ], - "Task Details": "This is a realistic legal scenario under Belgian company law, several elements of which are encountered in practice. \nTo complete this task, one has to classify the case as a conflict situation under the Belgian Code of Companies and combine this with the analysis of jurisdictional issues, in particular as regards the possibility to have the main case (exclusion of a shareholder from the company) combined with the issues of dissolution of the call option agreement and termination of the management agreement.", - "Reference Materials": "Belgian Code of Companies (CCA) \nBelgian Judicial Code\nPreparatory Works to the CCA\nThe term private limited company is used here to refer to a \"besloten vennootschap\" \nThe term registered office refers to \"maatschappelijke zetel\"", - "Realistic Task": 4, - "Realistic Explanation": "The case is representative of legal work as it relates to a scenario frequently put in place to organise succession and take-over in Belgian companies.", - "Difficult Task": 4, - "Difficulty Explanation": "The case is tricky because it concerns both the relationship among shareholders and, as regards the performance of the management agreement, the relationship between the company and an executive of the company. Among the elements of difficulty is to determine whether the recourse of exclusion under the Belgian Code of Companies can also be based on the latter relationship. \nThe reasoning requires several steps also in relation to jurisdictional competence, since it mixes the issue of fundamental trust among shareholders with the issue of purely pecuniary claims between stakeholders in the company" - }, - "Version 2": { - "Prompt": "The president of the board of directors of a non-listed Belgian private limited company (besloten vennootschap) with registered office in Gent, Belgium, wishes to obtain a concise assessment of a dispute situation that has arisen among shareholders. The president is an independent director who, at this stage, is not taking sides with one or the other of the parties involved in the dispute. At this stage, the focus is on understanding the legal framework applicable to the dispute rather than on settlement or full litigation strategy. \nThe facts of the dispute are as follows. \nIn 2018, a physical person being the majority shareholder and a director of the company concerned, sold 15 % of the shares to the general manager (CEO) in charge of the daily management of the company. No contractual veto rights are attaching to the CEO's shares. The CEO performs his management duties as a self-employed person (physical person) on the basis of a management agreement with the company. In 2020 the majority shareholder entered into a call option agreement entitling the CEO to purchase the remaining 85% of the shares; the price will be determined according to a formula on the basis of the parameters EBIT and net cash flow over the last 2 full accounting years (1 January through 31 December). The agreement provides that the exercise of the call option is conditional on the continued performance of the management agreement at the time of exercise. The performance of the company against these parameters deteriorated significantly and progressively in the last 3 accounting years. The majority shareholder blames this on account of the CEO's inaction in relation to market developments and decisions regarding accounting treatment. The majority shareholder alleges that the CEO thus acted with a view to jeopardising the majority shareholder's interest, engaging in behaviour aimed at lowering the exercise price of the call option. The majority shareholder convinces the board of directors of the company to terminate the management agreement of the CEO. Immediately thereafter, the majority shareholder sues the CEO in a proceeding aimed at (i) the expulsion of the CEO as shareholder of the company on the basis of misconduct and (ii) the dissolution of the call option agreement. The CEO announces that he will countersue to challenge the validity of the termination of his management agreement. \nThe president of the board of directors needs an assessment regarding the following questions. \nDoes the majority shareholder have a sound basis to (i) exclude the CEO as shareholder and (ii) obtain the dissolution of the call option agreement; and which judicial instance has competence to resolve these claims ? \nCan the CEO countersue in relation to challenge the validity of the termination of his management agreement before the same court ? \nConsider legal developments under Belgian law up until 31 December 2025. \nLeading up to each conclusion of the analysis, identify the specific legal provisions, (publicly available) case law of the highest level, or preparatory works that support it. Where useful, add references to (publicly available) recent doctrine relevant to the specific case at hand. Direct quotes of (sections of) key statutory provisions are to be added to facilitate review of the memo by the user. \nThe memo must be in English, but the appropriate terminology of a selection of key legal terms should be added in Dutch. \nProvide a concise executive summary.", - "Gold Response": "EXECUTIVE SUMMARY \n1\\. An action for exclusion of the CEO as shareholder is possible pursuant to Articles 2:60 to 2:67 of the Code of Companies and Associations (CCA) (_Wetboek van Vennootschappen en Verenigingen_). For the claimant's case to be viable, he will have to prove serious misconduct of the defendant as a shareholder, causing tension among shareholders jeopardising the company's interest and threatening its continuity. The alleged poor management performance on the part of defendant as such is not sufficient to meet this burden of proof. The prospects of success of the action of exclusion are uncertain. \n2\\. The dissolution of the call option agreement can be obtained in case of serious breach of contractual obligations under that contract. If bad faith amounts to the breach of a contractual obligation under the call option agreement, this could justify the dissolution. The probability of success appears low with respect to this demand, since the alleged poor management performance is not sufficient and there is no evidence of intentional manipulation. \n3\\. The President of the Enterprise Court of Gent (_Voorzitter van de ondernemingsrechtbank_) has jurisdiction over the action for exclusion of the CEO and the claim for dissolution of the call option agreement. The latter is connected to the action for exclusion on the basis of Article 2:62, §2 or §3 CCA. \n4\\. If the CEO countersues to challenge the termination of the management agreement, the acceptance of a joinder by the President of the Enterprise Court is probable on the basis of Article 2:62, §3 CCA. \n\nANALYSIS \nI. Action for exclusion of the CEO as a shareholder and claim to obtain dissolution of the call option agreement \n1\\. Main legal framework \nTitle 7 of Book 2 of the CCA governs dispute resolution between shareholders of public and private limited companies other than listed limited companies, including actions for exclusion of a shareholder. The procedure for exclusion of a shareholder is specifically regulated in Articles 2:60 to 2:67 CCA and falls within the jurisdiction of the President of the Enterprise Court deciding as if in summary proceedings (Article 2:62, §1 CCA) (_zitting houdend zoals in kortgeding_). The objective of such action is to obain a court decision forcing the defendant to transfer his shares to the claimant on the basis of \"well-founded reasons\". It can only be exercised by a claimant who holds shares representing at least 30% of the votes (or profit entitlement rights) attaching to all shares in the company (Article 2:63 CCA : \"_One or more shareholders of a private limited company who jointly hold securities representing 30% of the voting rights attached to all existing securities, or to which 30% of the profit rights are attached, may, for well-founded reasons, bring legal proceedings seeking an order that a shareholder transfer his or her securities to the claimants\"_). \nThe concept of well-founded reasons is an open norm, which is defined neither in the CCA nor in the Parliamentary Preparations to the CCA (_MvT, wetsontwerp tot invoering van het Wetboek van Vennootschappen en Verenigingen en houdende diverse Bepalingen, Kamer, 2017-2018, 4 juni 2018, nr. 54-3119;_ _Parl. St. Senaat 1993-94, nr. 1086, 2, 435_). Accordingly, it is for the President of the Enterprise Court to apply this norm, judging at his discretion whether well-founded reasons are present based on the evidence brought forward. According to the jurisprudence of the Belgian Court of Cassation, well-founded reasons must be such that maintaining the presence of the defendant as a shareholder in the company jeopardises the fundamental interests or the continuity of the company : \"_The valid grounds on the basis of which one or more shareholders may seek, through legal proceedings, an order requiring a shareholder to transfer his shares […] to them must be of such a nature that the continued presence within the company of the shareholder whose exclusion is sought endangers the fundamental interests or the continuity of the undertaking\" _(_Cass. 21 March 2014, Arr. Cass. 2014, 848; _Cass. 19 February 2009, Arr. Cass. 2009, 576). \nContrary to the action of forced exit (Articles 2:68 to 2:69 CCA), jeopardy to the shareholder interests of the claimant as such are not sufficient for exclusion of the defendant. \nThe exclusion action is a subsidiary mechanism, available only as a last resort if no other legal means are available to resolve the issue among stakeholders (_Vandenberghe L., \"De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter\", Financial Law Institute, Ghent University, 2025, p. 4_). \nIf well-founded resasons are established, the President of the Enterprise Court may order the defendant to transfer his shares to the claimant against payment of the price determined by the court (Article 2:67 CCA). An expert is usually appointed to handle the determination of the price. \nIn addition, the majority shareholder seeks to obtain the dissolution of the agreement providing the CEO with a call option to acquire the remaining 85% of the shares of the company. \nThe dissolution of a call option agreement is a matter mainly governed by Book 5 of the Belgian New Civil Code (NCC), in particular the first section of Article 5.90 NCC: \"_A reciprocal contract may be terminated where the debtor’s non-performance is sufficiently serious or where the parties have agreed that such non-performance justifies termination_ [...]\". \nIn terms of jurisdiction, Articles 2:62, §2 and §3 CCA are relevant to determine whether a joinder to the exclusion action is possible : \n[ ] Article 2:62, §2 CCA : \"_Insofar as this is necessary for the assessment of the admissibility of the action for exclusion or withdrawal, the president may decide any dispute concerning part or the entirety of the ownership right in the securities of the parties_\".\n[ ] Article 2:62, §3 : \"_The president may decide all related disputes concerning the financial relations between the parties and the company or companies or persons affiliated with it, in particular disputes relating to loans, current accounts and securities, and to non-competition clauses_\".\n\n2\\. Action for exclusion : probability of success seems rather low since burden of proof is hard to meet \nThe claimant holds 85% of the shares (and associated voting rights) of the company; the minimum requirement of a 30% shareholding as required under Article 2:63 CCA is therefore met. \nIn addition, the success of a claim for exclusion pursuant to Article 2:63 CCA requires that the claimant demonstrates well-founded reasons for the exclusion. Examples of well-founded reasons include a lasting and profound disagreement among shareholders paralysing the normal operation of the company, serious breach of duties of a shareholder, abuse of majority or minority powers resulting in violation of the company's interests, etc. (see also (_Cass. 21 maart 2014, Arr. Cass 2014, 848)_. In the case at hand, there is no situation of structural shareholder deadlock, since the CEO currently owns only 15% of the shares which does not amount to a blocking minority (whether under contract or at law). The argument of the majority shareholder needs to focus on trust breakdown linked to the conduct of the CEO as a shareholder or misconduct.\nUnlawful conduct or fault on the part of the defendant are not strictly required, but for well-founded reasons to be established, the continued participation of the defendant as a shareholder must jeopardise the fundamental interests or the continuity of the company. As is also mentioned in doctrine, the dispute resolution procedure does not purport to impose a sanction on a shareholder whose behaviour is questioned, but aims at resolving an impasse which threatens the functioning of the company (for a doctrinal comment on a similar set of facts, see _Vandenberghe L., \"De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter\", Financial Law Institute, Ghent University, 2025, p. 4_). \nAs a rule, well-founded reasons must relate to obligations of the defendant as a shareholder. Shortcomings and misjudgment in the role of manager are generally not sufficient. In view of the subsidiary character of the action of exclusion, the availabilty of other measures to act against management shortcomings (e.g. a liability claim or contract termination) is an element that weakens the position of the claimant. \nThis being said, the possibility to drive down the exercise price of the call option by management actions directly influencing the company's performance against the defined parameters contributed to the tension between the majority shareholder and the CEO as a shareholder. The case would therefore not be dismissed merely because the defendant's conduct concerns mainly management duties. The defendant is not only a manager but also a shareholder and the disputed behaviour could definitely influence the conditions at which the current percentage of shareholding is increased in the future and thus have an impact on the relations between the shareholders. \nHowever, for the claimant's case to be viable, he will have to prove that the CEO caused the breakdown of shareholder trust based on his conduct or engaged in serious misconduct and that his continued presence as a shareholder jeopardises the company's interest and threatens its continuity. In the case at hand, there are significant elements of uncertainty regarding this burden of proof : \n- uncertainty as to whether or not the CEO's conduct remains within the boundaries of ordinary business judgment (as opposed to serious management fault);\n- availability of alternative measures to act against undesirable management behaviour, including liability claim or termination of the management agreement; \n- absence of the general manager from the main governance body of the company, i.e. the Board of Directors; it is the Board which determines the company's strategy and policy and which is responsible for the supervision of day-to-day management;\n- relatively weak position of the defendant as a shareholder, since 15% of the shares does not constitute a blocking minority;\n- insistence by the majority shareholder that the CEO acted against his interest, whereas the success of the action hinges on demonstrating jeopardy to the company's interest; \n The probability of success of the claim for exclusion therefore seems rather low. \n\n3\\. Claim to obtain dissolution of the call option agreement : mere substandard business performance or poor business judgment not sufficient to obtain dissolution \nAccording to Article 5.90 of the Belgian New Civil Code (NCC), a contract with reciprocal obligations can be dissolved in case of contractual breach which is sufficiently serious or if the parties have agreed that a given type of breach warrants dissolution. In case the party seeking dissolution cannot rely on an express dissolution clause included inthe contract (Article 5.92 NCC) or does not wish to proceed to dissolution by giving written notice at his own risk (Article 5.93 NCC), he will have to sue for dissolution in court. \nThe facts of the case do not reveal a serious breach of contractual obligations by the CEO under the call option agreement. However, Article 5.73 NCC in general requires that a contract must be performed in good faith; it also provides that each party must act in accordance with the standard of a prudent and reasonable person placed in the same circumstances and that neither party is allowed to exercise contractual rights in an abusive manner. In order to justify the dissolution of a contract with reference to violation of the duty to act in good faith, the claimant has to establish that the violation of the duty to act in good faith amounts to breach of a contractual obligation and that such breach is of a level of seriousness which justifies dissolution of the contract. \nIn the case at hand, the deterioration of the company's performance against the parameters used in the formula for the determination of the call option excercise price and the fact that such deterioration causes a reduction of this price (i.e. negative management incentive) call for a critical review of the CEO's conduct against the standard of good faith. However, to obtain the dissolution of the call option agreement, the majority shareholder must prove that the alleged inaction of the CEO does not merely constitute substandard management performance or poor business judgment, but is driven by intent to manipulate the call option price. Likewise, the majority shareholder would have to prove that the decisions made by the CEO in respect of accounting treatment are driven by such intent to manipulate. Also, the absence of the general manager from the Board of Directors (being responsible for the company's strategy and policy and for the supervision of day-to-day management) significantly weakens the majority shareholder's case for dissolution of the call option agreement. The probability of success of the claim to obtain dissolution of the management agreement also seems rather low. \n\n4\\. Jurisdictional aspects in relation to the action for exclusion against the CEO as shareholder and claim to obtain dissolution of the call option agreement : competence of the President of the Enterprise Court of Gent\n(a) Claim for exclusion \nThe action for exclusion of the CEO must be brought before the President of the Enterprise Court of the registered office of the company (Gent), who decides as if in summary proceedings (Article 2:62,§1 CCA). The company must be summoned to appear as a party in the proceedings and informs the other shareholders, if any (Article 2:62,§1 CCA). \n(b) Dissolution of the call option agreement \nThe claim to obtain dissolution of the call option agreement concerns a commercial dispute which is not specifically governed by Title 7 of Book 2 of the CCA. \nHowever, Article 2:62, §2 CCE provides that the President of the Enterprise Court may also decide on any dispute regarding a part or the whole of the ownership rights on the shares of the parties, in sofar as this is necessary for the President's decision on the admissibility of the claim for exclusion. \nMoreover, Article 2:62, §3 CCA provides that the President of the Enterprise Court may adjudicate on any connected disputes (_samenhangende geschillen_) relating to the financial relationship between the parties and the company, in particular (but not limited to) disputes regarding loans, current accounts, security interests and non-compete clauses. An additional requirement to establish that the disputes are connected is based on Article 30 of the Belgian Judicial Code, which provides that disputes are connected only if the links between both are so close as to require the joint resolution thereof in order to avoid contradictory solutions. \nArticles 2:62, §2 and §3 CCA expand the basic rule of jurisdictional competence; in principle, they should be interpreted in a restrictive manner. However, a more flexible interpretation appears to be in line with legislative intent for reasons of efficiency of the conduct of court proceedings (\"proceseconomie\") (_Vandenberghe L., \"De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter\", Financial Law Institute, Ghent University, 2025, p. 6; Memorie van Toelichting, wetsontwerp tot invoering van het Wetboek van Vennootschappen en Verenigingen en houdende diverse bepalingen, KAMER, 2017-2018, 4 juni 2018, nr. 54-3119/001, 76_).\nIt is uncertain whether the resolution of the dispute regarding the call option agreement is necessary for the initial decision on the admissibility of the claim for exclusion as meant in Article 2:62, §2 CCA. However, the call option agreement relates to the (future) financial relationship between the parties and the company, since the exercise of the call option will determine the shareholding of each shareholder in the company (including entitlement to profits). In addition, a different outcome of, one the one hand, the action for exclusion of the CEO in relation to his current 15% shareholding and, on the other hand, the right to obtain additional shares (85%) pursuant to the call option agreement, would not be compatible with the principle of efficiency of the conduct of court proceedings (\"proceseconomie\"). It is therefore a connected dispute for purposes of Article 2:62, §3 CCA and falls within the competence of the President of the Enterprise Court resolving on the action for exclusion of the CEO. \n\nII. Jurisdictional aspects with respect to the CEO's recourse against termination of the management agreement : acceptance of joinder likely \nThe issue at stake is whether, upon initiation of the law suit of the majority shareholder for exclusion of the CEO and dissolution of the call option agreement, the CEO can countersue in the same proceedings before the President of the Enterprise Court with a view to overturning the termination of the management agreement .\nThe CEO has a clear interest in overturning the termination of the management agreement, since the right to exercise the call option is conditional on the continued performance of the management agreement at the time of exercise of the call option. Indeed, in case the President of the Enterprise Court were to reject the dissolution of the call option agreement requested by the majority shareholder, the CEO would still forfeit the benefit of the call option in case of lawful termination of the management agreement. \nFor the President of the Enterprise Court to accept a joinder of the CEO's countersuit to the majority shareholder's action for exclusion of the CEO, it has to be established that the disputes are connected. There is no connection in the sense of Article 2:62, §2 CCA, since the dispute on the termination of the management agreement is not a dispute with respect to the ownership of the sahres. In addition, the dispute on the termination of the management agreement does not directly concern the financial relationship between the company and a shareholder as meant in Article 2:62, §3 CCA, since the lawsuit seeks to invalidate the termination of the management agreement as opposed to a claim for financial compensation. \nNevertheless, It can be argued with good reason that this is a connected dispute in the meaning of Article 2:62, §3 CCA, since the right to exercise the call option and acquire additional shares is conditional on the continued performance of the management agreement at the time of exercise of the option. Just as the claim to obtain the dissolution of the call option agreement is connected to the action for exclusion because the former concerns the financial relationship between the parties and the company (cf. section I.4.(b) above), the counterclaim seeking to invalidate the termination of the management agreement is connected because the invalidation will ensure that the call option can still be exercised and additional share can be acquired. Notwithstanding the fact that the CEO is not suing the company for direct financial compensation in relation to termination of the management agreement, the right to exercise the call option (requiring the continuation of the call option agreement) and acquire shares in the company constitutes a financial relationship between the company and the parties as mentioned in Article 2:62, §3 CCA. \nIn conclusion, the President of the Entreprise Court of Gent is likely to take jurisdiction over the countersuit.", - "Associated Rubrics": 32, - "Rubrics": [ - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "Can the executive summary be traced to the conclusions in each analytical section of the memo?", - "justification": "The summary must provide a direct and quick response to the issues at stake " - }, - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "Does the analysis of jurisdiction in relation to the connected disputes show that it is weighing one potential ground for jurisdiction against the other ? ", - "justification": "This is core to the judicial strategy to be adopted by the claimant's and defendant's counsel " - }, - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "Does the executive summary correctly track the separate questions raised in the prompt?", - "justification": "The summary must provide a direct and quick response to the issues at stake " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "5", - "criterion": "Does the response mention that the President of the Enterpise Court of Gent has jurisdiction over the countersuit of the CEO with respect to the termination of the management agreement?", - "justification": "Article 2:62,§ 3 CCA and doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "3", - "criterion": "Does the response mention that the territorial jurisdiction of the case/dispute is with the Enterprise Court of Gent?", - "justification": "The registered office of the company is located in Gent, Belgium" - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "1", - "criterion": "Does the response mention that the expulsion of a shareholder can be obtained via the dispute resolution of Title 7 Book 2 of the CCA?", - "justification": "Framework for exclusion is set forth in Articles 2:60 to 2:67 CCA " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "1", - "criterion": "Does the response state that the action for exclusion is possible for a private limited company (besloten vennootschap)?", - "justification": "Scope of Article 2:60 CCA is limited to private and public limited companies " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "-3", - "criterion": "Does the response fail to reference case law at the level of the Cour de Cassation for purposes of defining well-founded reasons?", - "justification": "Cass. 21 maart 2014, Arr. Cass 2014, 848" - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "3", - "criterion": "Does the response apply the requirement of proces economie (efficiency of the conduct of court proceedings) in its argument to allow the joinder of the action with respect to the call option agreement to the action for exclusion?", - "justification": "This requirement is stated in doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "1", - "criterion": "Does the response correctly recognise that the CEO is not an employee of the company?", - "justification": "Information provided in the prompt and necessary for the analysis of jurisdiction " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the response refer to Article 2:62, § 3 CCA for its argument for the joinder of the countersuit with respect to the termination of the management to the action for exclusion?", - "justification": "Article 2:62, §3 CCA allows the joinder with respect to disputes in relation to the financial relations between the parties and the company. Since the continuation of the management agreement is a condition for the validity of the right to exercise the call option and acquire additional shares, it concerns such financial relationship " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the response recognise that the absence of the CEO from the Board of Directors of the company is an important factor for resolving the dispute with respect to exclusion as a shareholder?", - "justification": "This element is mentioned in the prompt and is part of the legal reasoning on similar cases in doctrine (doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "Does the response characterise the action for exclusion as a subsidiary mechanism to resolve disputes with respect to stakeholders in companies?", - "justification": "Principle established in doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "Does the response indicate that the argument that the joinder of the action related to the dissolution of the call option agreement is stronger through Article 2:62, § 3 CCA?", - "justification": "Article 2:62, § 3 CCA, which does not contain the requirement that the resolution of the dispute is necessary for the initial decision on the admissibility of the claim for exclusion as meant in Article 2:62, § 2 CCA" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "Does the response recognise that the CEO must countersue for the invalidation of the termination of the management agreement in order to secure his rights under the call option agreement?", - "justification": "The right to exercise the call option is conditional on continued performance of the management agreement as stated in the prompt" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "Does the response mention that to obtain the dissolution of the call option agreement, a violation of the duty to act in good faith must be argued?", - "justification": "Article 5.73 New Civil Code" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "Does the response mention that, in order for management conduct to support a claim for exclusion of a shareholder, substandard business judgment is not sufficient?", - "justification": "Principle established in doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "Does the response clarify that Well founded reasons is characterised as an open norm that should be further interpreted by the judge?", - "justification": "Principle established in the Preparatory Works to the CCA (MvT, wetsontwerp tot invoering van het Wetboek van Vennootschappen en Verenigingen en houdende diverse Bepalingen, Kamer, 2017-2018, 4 juni 2018, nr. 54-3119)" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "3", - "criterion": "Does the response recognise that the fact that the CEO is not suing for financial compensation for the termination of the management agreement is a relevant factor to be considered on the issue of connectedness to the CEO's action for exclusion?", - "justification": "This element is mentioned in the prompt and is part of the legal reasoning on similar cases in doctrine (doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "Does the response mention that the substantive requirement of well-founded reasons (or lawful grounds) in an action for exclusion is linked to the company's interest?", - "justification": "Principle established in the Preparatory Works to the CCA and in jurisprudence (Cass. 21 maart 2014, Arr. Cass 2014, 848; Parl. St. Senaat 1993-94, nr. 1086, 2, 435)" - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "Does the response mention that well founded reasons must relate to obligations of the defendant as a shareholder?", - "justification": "Principle established in the Preparatory Works to the CCA and in doctrine (Parl. St. Senaat 1993-94, nr. 1086, 2, 435; Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025" - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "Does the response clarify that the jurisdiction of the President of the Enterprise Court over exclusion actions is as in summary proceedings?", - "justification": "Article 2:61, § CCA" - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "Does the response mention that the joinder of the disputes related to the action for exclusion is possible under Articles 2:62, §2 and 2:63, §3 CCA?", - "justification": "Articles 2:62, §2 or 2:63, §3 CCA " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the response reference the Preparatory Works to the companies legislation when analysing the requirement of well-founded reasons?", - "justification": "Parl. St. Senaat 1993-94, nr. 1086, 2, 435" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the response reference Article 5.73 of the New Civil Code in its argument pertaining to the duty to act in good faith?", - "justification": "Article 5.73 New Civil Code expands on the duty to act in good faith " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the response reference the Jurisprudence of the Belgian Court of Cassation in its analysis of the requirement of well-founded reasons", - "justification": "Cass. 21 maart 2014, Arr. Cass 2014 " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "3", - "criterion": "Does the response reference Article 30 of the Belgian Judicial Code in the argument of whether the dispute regarding the call option agreement is connected to the action for exclusion?", - "justification": "Article 30 of the Belgian Judicial Code and doctrine (Vandenberghe L., De vordering tot uitsluiting : een blik op de gegronde redenen en de verruimde bevoegdheid van de rechter, Financial Law Institute, Ghent University, 2025) " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "1", - "criterion": "Does the response mention that the claim to obtain dissolution of the call option agreement is possible pursuant to Article 5.93 New Civil Code ?", - "justification": "Article 5.93 New Civil Code" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "1", - "criterion": "Do the references to provisions of the Belgian Civil Code in the response refer to the New Civil Code?", - "justification": "The previous version of the Civil Code was superseded by a new version" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the memorandum fail to state that, as a fundamental condition for being able to bring the action for exclusion, the claimant must own shares representing at least 30% of the votes or profit entitlement rights attaching to all shares of the company?", - "justification": "Requirement in Article 2:63 CCA " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the memorandum fail to state that, with respect to the action for exclusion, material jurisdiction is with the President of the Enterprise Court?", - "justification": "Requirement in Article 2:62, § 1 CCA" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the memorandum fail to state that, as a procedural requirement, the claimant must also summon the company to appear in the proceedings?", - "justification": "Requirement in Article 2:62, §1 CCA " - } - ], - "Task Details": "This is a realistic legal scenario under Belgian company law, several elements of which are encountered in practice. \nTo complete this task, one has to classify the case as a conflict situation under the Belgian Code of Companies and combine this with the analysis of jurisdictional issues, in particular as regards the possibility to have the main case (exclusion of a shareholder from the company) combined with the issues of dissolution of the call option agreement and termination of the management agreement.", - "Reference Materials": "Belgian Code of Companies (CCA) \nBelgian Judicial Code\nPreparatory Works to the CCA\nThe term private limited company is used here to refer to a \"besloten vennootschap\" \nThe term registered office refers to \"maatschappelijke zetel\"", - "Realistic Task": 4, - "Realistic Explanation": "The case is representative of legal work as it relates to a scenario frequently put in place to organise succession and take-over in Belgian companies.", - "Difficult Task": 4, - "Difficulty Explanation": "The case is tricky because it concerns both the relationship among shareholders and, as regards the performance of the management agreement, the relationship between the company and an executive of the company. Among the elements of difficulty is to determine whether the recourse of exclusion under the Belgian Code of Companies can also be based on the latter relationship. \nThe reasoning requires several steps also in relation to jurisdictional competence, since it mixes the issue of fundamental trust among shareholders with the issue of purely pecuniary claims between stakeholders in the company" - } - }, - "Legal Task #93": { - "Area": "Corporate & M&A", - "Original Version": { - "Prompt": "You are a corporate lawyer in England and Wales. An England and Wales incorporated company requires assistance as follows: The Client has one majority shareholder, and 3 other investors, all party to a shareholders agreement. One investor has breached the terms of the shareholders' agreement by working for a competitor. The founder has notified the breaching shareholder and they agree they should separate. Accordingly, the founder and/or Company want to quickly remove them and buy back their shares. The shareholder agreement does not state price or or mechanism. They previously bought their shares for 100,000 GBP, but a latest valuation has their shares valued at 250,00. The founder has other business interests so wants to manage this carefully and lawfully. \nThe Company has 100,00 GBP in its bank account, but does not have distributable reserves, only retained losses of 200,000. It has a share premium account with funds of 100,000 + in it. Analyse and report the options for this business and what might act as a blocker for each option. Present the founder of the Company with a legal memo, outlining the basis for which they should agree a reasonable and defendable price for the share buyback and outline a structured list of options for them to remove this shareholder. Please provide sources and verifiable public resources from which you have based your response. Please also consider whether the founder can also act as the purchasing conduit or if the Company can support this shareholders' acquisition in a lawful way.", - "Gold Response": "**Background**\nWe have been asked to set out some advice to the founder of a company incorporated in England and Wales (the \"**Company**\"). We understand that the Company has one majority shareholder (the \"**Founder**\") and three minority investors, all of which are party to a shareholders' agreement (the \"**SHA**\"). The problem requiring assistance is that one minority investor has breached the SHA by working for a competitor(the \"**Breaching Shareholde**r\"). The SHA contains no express compulsory transfer provision, bad leaver clause, or price mechanism to fall back on an utilise in this breach scenario. However, the SHA must be reviewed in full before the Company takes any steps.\n\nThere are two key pillars here: price(because this is a key commercial factor which impacts the legals), and then process (because we need to outline the mechanics which may or may not be available).\n\n**(A) Price**\nWith the SHA being silent on price, we have to consider what price to actually agree. It goes without saying that the Company's financial position is crucial. It holds £100,000 cash at bank and a share premium account of just over £100,000, but carries accumulated losses of £200,000 and therefore has no distributable reserves. The Breaching Shareholder originally acquired their shares for £100,000 and the current independent valuation values them now at £250,000. These figures have a large impact on the analysis and options below because the financial health of the Company creates some material blockers. \n\nFrom a legal perspective, the Company cannot necessarily force a price because the Breaching Shareholder breached the SHA. A departing shareholder retains their membership rights and the protections that attach to them until their shares are validly transferred or cancelled, irrespective of the breach. Under s.994 CA 2006, any shareholder may petition the court on grounds of unfairly prejudicial conduct, and the courts have consistently held that a forced transfer at a price that does not reflect fair market value can support such a petition. In O'Neill v Phillips [1999] UKHL 24, Lord Hoffmann confirmed that the appropriate measure in a buyout context is ordinarily the fair value of the shares on a pro rata basis, without minority discount. Therefore, a transfer at the original acquisition cost of £100,000 (against a current valuation of £250,000), without any contractual basis for that differential, creates a risk for the Company.\n\nA negotiated discount below fair market value can still be possible, but either:\n 1. it requires justification linked to a quantifiable loss caused by the breach (rather than to the fact of breach itself). English law will not enforce a provision, or give effect to a price, that operates as a penalty disproportionate to the innocent party's legitimate commercial interest. This was confirmed by the Supreme Court in Cavendish Square Holding BV v Makdessi [2015] UKSC 67. Any discount should therefore be documented by reference to specific, demonstrable loss.\n 2. requires a negotiated settlement at that figure, agreed by the Breaching Shareholder. Where a shareholder voluntarily agrees a price and transfers their shares on that basis, they cannot subsequently petition for unfair prejudice by reference to that price because the transfer was consensual, and the agreed consideration reflects the parties' own commercial resolution of the matter (O'Neill v Phillips [1999] UKHL 24 and Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch)). If the competitive activity has caused quantifiable loss to the company such as damage to a commercial relationship, diversion of business opportunities, or costs incurred in consequence of the breach, those claims have real value as negotiating leverage. A settlement at £100,000 in exchange for a full release of all such claims, combined with a clean exit and the avoidance of protracted litigation, may be an outcome the Breaching Shareholder is willing to accept, particularly if the Company's damages claim is backed up. \nHowever, with regards to a negotiated settlement, the parties will need to negotiate a settlement agreement, recording that the price was freely negotiated, that the Breaching Shareholder received or had the opportunity to take independent legal advice, and that the agreed consideration reflects a full and final resolution of all claims between the parties. That should hedge against any claims of unfairness down the line. \n\nWhilst a fair market value (£250,000 on the current valuation) remains the appropriate and most defensible benchmark where no settlement at a lower figure can be achieved, there is a basis to negotiate price. Whatever price is ultimately agreed, the Board, having mind to their directorial duties, should pass a formal resolution recording the valuation evidence relied upon and the commercial rationale for the agreed figure. \n\n**(B) Process**\n**Figuring out the price to pay is one step, the next is to then consider the basis through which this can legally be carried out. Please note - the Company should first analyse its articles of association and SHA to determine any further or bespoke restrictions placed upon it. These could relate to pre-emption rights or specific restrictions on share buybacks. **\n1. A company incorporated in England and Wales may purchase its own shares pursuant to sections 690–708 of the Companies Act 2006 (the \"**CA 2006**\"). The Company's shares are not traded on a recognised investment exchange, therefore, any buyback from the Breaching Shareholder would constitute an off-market purchase under s.693 CA 2006, and the following conditions must be satisfied before that purchase can lawfully proceed.\n 1. The Company's articles of association must not prohibit a share buyback. \n 2. The terms of the proposed purchase contract must be authorised by ordinary resolution of the shareholders (being approval if 50% of the Shareholders so entitled to vote on it) before the contract is entered into (s.694(1) CA 2006). Being that this is the actual agreement between the Breaching Shareholder and the Company, a copy of the proposed contract must be made available for inspection at the Company's registered office and at the meeting itself (s.696 CA 2006). One procedural feature of the off-market purchase regime is worth noting at the outset is that the Breaching Shareholder is prohibited from voting on the resolution to approve the terms of their buyback (s.694(4) CA 2006). \n 3. The purchase price must be paid out of the company's distributable profits, or out of the proceeds of a fresh issue of shares made for the specific purpose of financing the purchase (s.692(2) CA 2006). \n 4. the Shares acquired by the Company must either be cancelled immediately upon completion (s.706 CA 2006) or held as treasury shares in accordance with ss.724–732 CA 2006. In most cases for a private company in these circumstances, cancellation is the appropriate course.\n 5. Finally, a return of the purchase must be filed at Companies House within 28 days of completion.\n\n**Options to fund the buyback:**\n1. **Out of Distributable Profits**. \n 1. Section 692(2) CA 2006 is the provision that impacts whether or not the Company can execute the buyback at this stage. The purchase price in a share buyback must be paid from the company's distributable profits, or from the proceeds of a fresh share issue made specifically to fund the buyback. Distributable profits are defined by s.830 CA 2006 as a company's accumulated realised profits less its accumulated realised losses. We note that the Company has accumulated losses of £200,000 and therefore has no distributable profits/reserves\n 2. A key trap here in these circumstances, and one to emphasise, is that cash at bank and distributable profits are not the same thing. A company with cash on its balance sheet but accumulated losses has no distributable profits and cannot fund a buyback from that cash, regardless of how much it holds. Therefore, if the Company proceeded using its £100,000 in cash, this would constitute an unlawful return of capital, would render the buyback void, and would expose each director to personal liability. \n\n**2.Using the share premium account **(the** \"SPA\"). **\n 1. The share premium account arises under s.610 CA 2006 when shares are issued at a price above their nominal value and accordingly the excess is credited to the SPA rather than to the profit and loss account. It is a capital account and its application is restricted by statute. Funding a share buyback is not a permitted application of the SPA. Therefore, applying it for that purpose would constitute an unlawful reduction of capital and would therefore be void. The SPA cannot, in other words, simply be redirected to pay for the Breaching Shareholder's shares.\n 2. There is, however, an indirect route. The SPA can be eliminated through a formal capital reduction under Part 17 CA 2006 (ss.641–653). Once reduced to nil through that process, the accounting effect (confirmed by ICAEW Technical Release TECH 02/17BL) is to create a realised reserve of equivalent amount, which is then distributable and can be applied to fund a share buyback. \n 3. This capital reduction process requires, broadly:\n 1. the directors to sign a statutory solvency statement under s.642 CA 2006 confirming the Company can pay its debts for the following 12 months; and \n 2. the shareholders to pass a special resolution approving the reduction and make the necessary Companies House filings. \n 4. Unfortunately, this capital reduction process creates only £100,000 of distributable reserves which insufficient to fund a £250,000 buyback alone. If £100,000 is agreed, this is still not workable because the losses are £200,000 so there would still be retained losses of £100,000 and thus we are still not able to use this route. \n\nPlease note that each signatory to the solvency statement is personally criminally liable if they sign without reasonable grounds (s.643(4) CA 2006), and accounting advice must be taken beforehand. This is an important point for this capital reduction process because it exposes the directors to significant liability if they act incorrectly. \n\n**3.Fresh Issue of Shares**\n\nSection 692(2)(b) CA 2006 permits a company to fund a buyback from the proceeds of a fresh share issue made specifically for that purpose. In principle this would get around the two issues above. However, it is highly unlikely that an investor can be found quickly and it is also unlikely that this current dispute won't give them pause. Accordingly, this option is included for completeness and is not really a viable route.\n\n_A Note on Financial Assistance_\nUnlike for public companies, private limited companies are not subject to the financial assistance prohibition under ss.677–683 CA 2006. That prohibition was relaxed for private limited companies. Unfortunately, this does not eliminate some other problems which arise were the Company to try and assist the Founder (or another Shareholder) with buying the Breaching Shareholder's shares. Firstly, under s.829 CA 2006, any distribution by a company to its members must be made out of distributable profits, which we have established are already not present. If a loan to the Founder were made on terms that are not genuinely commercial, there is a real risk that a court would characterise it not as a loan but as a distribution. If so, it would be an unlawful distribution given the that the Company has no distributable profits. The consequences are the same consequences as an unlawful buyback (being rendered void, and exposing each director to personal liability for the amount paid out).\nSecondly, under s.172 CA 2006, directors must act in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole. A loan to the Founder (or other Shareholder) at a time when the Company holds only £100,000 in cash and carries accumulated losses of £200,000 obviously requires careful justification, which is beyond the scope of this memo as it is likely a very high hurdle to clear. The directors would need to satisfy themselves that making the loan is genuinely in the Company's interests, that it would not leave the Company unable to meet its own liabilities as they fall due, and that shareholder interests have been properly considered. A loan that cannot be justified on those grounds exposes the directors to a claim for breach of duty. \nFor the avoidance of doubt, the Company taking out a loan in order to then fund a further Founder (or Shareholder) loan is also unrealistic (due to the lender's own diligence and compliance checks when reviewing the reasoning for the loan) and nevertheless problematic. Incurring a liability on the Company's balance sheet in order to fund the Founder's (or other Shareholder's) personal acquisition would be very difficult to justify under s.172 CA 2006 at a time when the Company already carries significant accumulated losses, and would expose the directors to a claim for breach of duty. \n\n**Conclusion**\nThe above clearly shows that a price needs to be agreed, and even that is complicated and not without risk. It is noted that the Company wanted to move quickly here, but unfortunately the Company cannot fund a buyback today because it has no distributable reserves, and the capital reduction route does not resolve the position either given the accumulated losses of £200,000. The Company's road to funding a buyback is therefore either:\n(1) to wait until its accounting position has improved sufficiently to generate distributable reserves that exceed the accumulated losses and cover the purchase price in full (or if the SPA remains available at that point to use a capital reduction of the SPA to top up whatever distributable reserves exist at the time, provided the combined figure is sufficient to meet the agreed price). In either case, accounting advice should be taken before proceeding to confirm the distributable position at the relevant time. They will also still need to follow the statutory procedure at that time. \n(2) The Founder should consider whether they have the personal resources (now or via borrowing) to acquire the shares directly in their personal capacity.\n(3) Equally, other shareholders could be asked if they wish to acquire the shares directly from the Breaching Shareholder, but this would be subject to their own financial circumstances. \n\nFinally, regardless of the above, the Company should take steps to protect its position in the event that the current agreement in principle breaks down. That means gathering evidence of the Breaching Shareholder's competitive activity which might support both a damages claim and any future litigation (if it gets to that). The Company should also consider whether it is in a position to restrict the Breaching Shareholder's ongoing activities in the interim. The Breaching Shareholder may cause further harm if not managed properly. For example, the Company could minimise this risk by enforcing any continuing confidentiality obligations under the SHA, requiring the return of confidential information or company property, or simply notifying the Breaching Shareholder in writing of the obligations that continue to bind them under tthe SHA. Any such steps must be taken carefully because any restrictions that go beyond what the SHA expressly permits, or that could be characterised as oppressive conduct toward a minority shareholder, also pose potential risk to the Company. \n\n**References.**\n\nCompanies Act 2006, s.610 — share premium account: . \nCompanies Act 2006, Part 18 (ss.658–737) — share buybacks: . \nCompanies Act 2006, s.641–644 — capital reduction: . \nCompanies Act 2006, s.677–683 — financial assistance: . \nCompanies Act 2006, s.692(2) — funding of share buybacks: . \nCompanies Act 2006, s.694 — off-market purchases: . \nCompanies Act 2006, s.830 — distributable profits: . \nCompanies Act 2006, s.994 — unfair prejudice: . \nICAEW Technical Release TECH 02/17BL — Distributable Profits: . \nO'Neill v Phillips [1999] UKHL 24: . \nCavendish Square Holding BV v Makdessi [2015] UKSC 67: . \nRe Sunrise Radio Ltd [2009] EWHC 2893 (Ch): .", - "Associated Rubrics": 30, - "Rubrics": [ - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "Is the answer written in a professional tone and manner?", - "justification": "The answer should reflect that this was a requirement for a legal memo which should be written professionally and not colloquially. " - }, - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "Does the answer provide multiple options and a conclusion?", - "justification": "The goal is to not provide one answer, nor is it to provide some options without any conclusion " - }, - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "Does the answer use defined terms consistently throughout?", - "justification": "Legal outputs should match legal documentation style and consistent use of defined terms is an important marker of professionalism and legal register" - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "5", - "criterion": "Does the answer identify that the Breaching Shareholder cannot be compelled to transfer their shares in the absence of an express contractual mechanism?", - "justification": "This is crucial because the Company has to understand that it must work towards a formal and binding agreement to resolve this matter." - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "5", - "criterion": "Does the answer correctly identify that the Company's articles of association and SHA must be reviewed for additional restrictions?", - "justification": "We have not seen these documents, but the response has to recognise that these documents may change the fact pattern substantively if they contain certain restrictions (i.e. a de minimis is a good example). " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "3", - "criterion": "Does the answer state that the Company has no distributable reserves and that this prevents a company-funded share buyback under s.692(2) CA 2006?", - "justification": "If this is not identified early on, the answer can include a lot of wasteful and irrelevant content" - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "5", - "criterion": "Does the answer distinguish between cash at bank and distributable profit?", - "justification": " Cash at the bank and the distributable reserves are not the same thing. This is an accounting and financial point reflecting how the law does not operate in a vacuum. " - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "5", - "criterion": "Does the answer identify and explain why, despite the financial assistance prohibition no longer applying, a loan to the Founder (or Shareholder) to fund the purchase will still be unlawful?", - "justification": "Financial assistance no longer applying does not create a workaround here because it still comes back to the fact that the Company does not have distributable reserves, so it cannot pay a dividend and it would be extremely difficult to justify, document and stand behind making a loan in its financial circumstances. " - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "5", - "criterion": "Does the answer identify the unfair prejudice risk under s.994 CA 2006 of engineering a transfer at below fair market value without contractual justification", - "justification": "Failing to identify this means failing to identify a key potential risk" - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "5", - "criterion": "Does the answer state that a settlement agreement should be drafted recording that the price was freely negotiated and that the Breaching Shareholder had the opportunity to take independent legal advice?", - "justification": "This was not explicitly asked, but is implied. Agreeing the price is one thing, the Company should now seek to protect and document this agreement suitably to avoid risk of challenge down the line" - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "1", - "criterion": "Does the answer correctly identify that the Breaching Shareholder is prohibited from voting on the resolution to approve the terms of their own buyback under s.694(4) CA 2006?", - "justification": "Th answer should provide helpful procedural points and this is a useful practical note if they are worried about passing a resolution relating to this shareholder" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer cover the link between Price and Process?", - "justification": "Being able to do the buyback is one thing, but this is still a comemrcial arrangement and so the price factor can affect how the process actually plays out" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer state that even after a capital reduction of the SPA, the accumulated losses of £200,000 would absorb the £100,000 reserve created, leaving the Company (still) unable to fund a buyback", - "justification": "This again highlights the commercial and practical nature of this scenario - using the capital reduction of the SPA provides extra funds, but the losses amount must still not be greater than the buyback purchase price, otherwise you are still stuck at the first hurdle of not having distributable reserves/profits. " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer explain why the fresh issue of shares route is theoretically available but practically unviable?", - "justification": "The answer may provide options which, whilst technically possible, are just unrealistic and this is a key part of advice. Outlining a potential solution on paper is very different to outlining a viable path forward." - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer recommend that the Company gather and preserve evidence of the Breaching Shareholder's competitive activity to support a potential damages claim", - "justification": "Ultimately, this brings us back to the point that this is a contentious matter with additional considerations to bear in mind and represents going the extra mile outside of the brief. " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer identify the negotiated settlement at £100,000 as a possible route?", - "justification": "This is a practically important route that a strong answer should identify. It also has a direct funding advantage given the Company's cash position. A response that treats £250,000 as the only defensible price misses a potential commercial solution." - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "1", - "criterion": "Does the response correctly identify that the other non-breaching minority investors could also be approached as potential personal purchasers of the Breaching Shareholder's shares", - "justification": "It is crucial to set out who can actually purchase these shares and the Founder and Company are not the only ones." - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "3", - "criterion": "Does the answer correctly state that the solvency statement can create criminal liability for signing without reasonable grounds for the opinions under s.643(4) CA 2006", - "justification": "If the capital reduction of SPA is now or in future a route, the directors who sign this solvency statement have to understand the seriousness of this commitment. " - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "1", - "criterion": "Does the answer state that the Company taking out a loan would still not be workable?", - "justification": "Additional lending creates a liability (financial and legal on the part of the directors). It is also highly unlikely a lender will lend to a business without profits and when the purpose is to onwardly fund a breaching shareholder's exit " - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "1", - "criterion": "Does the answer correctly identify that shares purchased by the Company must be cancelled or held as treasury shares?", - "justification": "Important to note because it highlights process point and legal requirement. " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the answer cite CA 2006, s.692(2) as the statutory basis for the distributable reserves requirement", - "justification": "This is the operative part of the CA 2006" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the answer cite Companies Act 2006, ss.641–644 as the statutory basis for the Capital Reduction route", - "justification": "This is the operative part of the CA 2006" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the answers cite both O'Neill v Phillips [1999] UKHL 24 and Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch) together in support of the negotiated settlement route", - "justification": "These are authorities for the position stated. " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the answer cite Cavendish Square Holding BV v Makdessi [2015] UKSC 67 in support of the proposition that any discount below fair market value must be based on a legitimate commercial interest and demonstrable loss and not a penalty", - "justification": "Authority for the position stated. " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer recommend or advise a course of action that would constitute oppressive conduct toward the Breaching Shareholder as a minority member?", - "justification": "This creates a potential pitfall for the Company because if they mismanage this situation they risk making an already contentious situation worse" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer fail to distinguish between a company share buyback under Part 18 CA 2006 and a personal acquisition by the Founder or other shareholders?", - "justification": "Our client is the Company but it was stated that the Founder might be able to buy the shares. Nevertheless, the treatment is different for both and it must be separated out accordingly to avoid conflating the two and creating an unclear plan of action for either. " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer fail to identify that fair market value is the appropriate default pricing benchmark in the absence of an express contractual mechanism?", - "justification": "It might be tempting to just say the same price of £100,000 is suitable, but this is problematic and risks creating a problem straight away" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer fail to distinguish cash in the bank from distributable profits and conflate the two", - "justification": "This is a key distinction " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer state that the Company can proceed with a buyback out of distributable reserves at this point in time?", - "justification": "This is obviously not possible based on these facts" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer state that capital reduction via SPA will work straightaway?", - "justification": "This is obviously not possible based on these facts" - } - ], - "Task Details": "Share buybacks are nuanced because there is a legal process in the UK, but sometimes the commercial realities are rather nuanced. Often corporate lawyers deal with shareholder breaches and company disputes. However this hinges on the lawyers and the finance professional working together to understand the financial and legal mechanics of a buyback actually being possible. The key is to try and offer up alternative solutions and to understand the flexibility of this task based ont he financial situation of the company.", - "Reference Materials": "https://www.legislation.gov.uk/ukpga/2006/46/contents", - "Realistic Task": 3, - "Realistic Explanation": "This is a common scenario - breaching SH, company wanting to act but the financials creating a barrier.", - "Difficult Task": 3, - "Difficulty Explanation": "I think lawyers and I suspect perhaps AI may get a bit lost with the right path forward. The numbers may need changing - the point is that it might not be possible to do the share buyback, so perhaps it falls on the Founder to somehow do this (which again is not so straightforward). The AI might force a solution, but the best solution might be to wait" - }, - "Version 1": { - "Prompt": "You are a corporate lawyer in England and Wales. An England and Wales incorporated private limited company requires assistance as follows: The Client has one majority shareholder, and 3 other investors, all party to a shareholders agreement. One investor (not a director or employee) has breached the terms of the shareholders' agreement by working for a competitor. The founder has notified the breaching shareholder and they agree they should separate. Accordingly, the founder and/or Company want to quickly remove them and buy back their shares. The SHA contains no express compulsory transfer provision, bad leaver clause, or price mechanism to fall back on an utilise in this breach scenario. They previously bought their shares for 100,000 GBP, but a latest valuation has their shares valued at 250,000. The founder has other business interests so wants to manage this carefully and lawfully. \nThe Company has 100,00 GBP in its bank account, but does not have distributable reserves, only retained losses of 200,000. It has a share premium account with funds of 100,000 + in it. Analyse and report the options for this business and what might act as a blocker for each option. Present the founder of the Company with a legal memo, outlining the basis for which they should agree a reasonable and defendable price for the share buyback and outline a structured list of options for them to remove this shareholder. Please provide sources and verifiable public resources from which you have based your response. Please also consider whether the founder can also act as the purchasing conduit or if the Company can support this shareholders' acquisition in a lawful way.", - "Gold Response": "**Background**\nWe have been asked to set out some advice to the founder of a company incorporated in England and Wales (the \"**Company**\"). We understand that the Company has one majority shareholder (the \"**Founder**\") and three minority investors, all of which are party to a shareholders' agreement (the \"**SHA**\"). The problem requiring assistance is that one minority investor has breached the SHA by working for a competitor(the \"**Breaching Shareholde**r\"). The SHA contains no express provisions, but it still must be reviewed in full (alongside the articles of association) before the Company takes any steps. \n\n**Executive Summary**\nThe analysis below sets out the position for the Company, but in short, a buyback of the Breaching Shareholder's shares by the Company is not possible at this stage. The parties should first negotiate a settlement based on a suitable valuation metric and taking into consideration the nature of the breach and then consider whether the Founder can acquire these shares directly through self-financing. \n\n**Analysis**\nThere are two key pillars here: price(because this is a key commercial factor which impacts the legals), and then process (because we need to outline the mechanics which may or may not be available).\n\n**(A) Price to pay for the Breaching Shareholders' Shares**\nWith the SHA being silent on price, we have to consider what price to actually agree. There is also no single correct answer on value, because each valuation methodology (i.e. such as multiple of profits, market comparables etc.) can each produce a materially different figure for the same company, and none is inherently more correct than another. The parties likely have to each take independent valuation advice, and the Board should be prepared for a range rather than a single number.\n\nIn any event, tt goes without saying that the Company's financial position is crucial. It holds £100,000 cash at bank and a share premium account of just over £100,000, but carries accumulated losses of £200,000 and therefore has no distributable reserves. The Breaching Shareholder originally acquired their shares for £100,000 and the current independent valuation values them now at £250,000. These figures have a large impact on the analysis and options below because the financial health of the Company creates some material blockers. \n\nFrom a legal perspective, the Company cannot necessarily force a price because the Breaching Shareholder breached the SHA. A departing shareholder retains their membership rights and the protections that attach to them until their shares are validly transferred or cancelled, irrespective of the breach. Under s.994 CA 2006, any shareholder may petition the court on grounds of unfairly prejudicial conduct, and the courts have consistently held that a forced transfer at a price that does not reflect fair market value can support such a petition. In O'Neill v Phillips [1999] UKHL 24, Lord Hoffmann confirmed that (i) the appropriate measure in a buyout context is ordinarily the fair value of the shares on a pro rata basis, without minority discount and (ii) that exclusion of a shareholder from management without a reasonable offer to purchase their shares will likely constitute unfair prejudice. If fair value cannot be agreed between the parties, it should be determined by a competent independent expert. Therefore, a transfer at the original acquisition cost of £100,000 (against a current valuation of £250,000), without any contractual basis for that differential, creates a risk for the Company.\n\nA negotiated discount below fair market value can still be possible, but either:\n 1. it requires justification linked to a quantifiable loss caused by the breach (rather than to the fact of breach itself). The relevant constraint is the unfair prejudice jurisdiction under s.994 CA 2006: a below-market price imposed without proper justification exposes the Company to a petition by the Breaching Shareholder. Any discount should therefore be documented by reference to specific, demonstrable loss.\n 2. requires a negotiated settlement at that figure, agreed by the Breaching Shareholder. Where a shareholder voluntarily agrees a price and transfers their shares on that basis, they cannot subsequently petition for unfair prejudice by reference to that price because the transfer was consensual, and the agreed consideration reflects the parties' own commercial resolution of the matter (O'Neill v Phillips [1999] UKHL 24 and Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch)). If the competitive activity has caused quantifiable loss to the company such as damage to a commercial relationship, diversion of business opportunities, or costs incurred in consequence of the breach, those claims have real value as negotiating leverage. A settlement at £100,000 (being the price originally paid) in exchange for a full release of all such claims, combined with a clean exit and the avoidance of protracted litigation, may be an outcome the Breaching Shareholder is willing to accept, particularly if the Company's damages claim is backed up. \nHowever, with regards to a negotiated settlement, the parties will need to negotiate a settlement agreement, recording that the price was freely negotiated, that the Breaching Shareholder received or had the opportunity to take independent legal advice, and that the agreed consideration reflects a full and final resolution of all claims between the parties. That should hedge against any claims of unfairness down the line. \n\nWhilst a fair market value (£250,000 on the current valuation) remains the appropriate and most defensible benchmark where no settlement at a lower figure can be achieved, there is a basis to negotiate price. Whatever price is ultimately agreed, the Board, having mind to their directorial duties, should pass a formal resolution recording the valuation evidence relied upon and the commercial rationale for the agreed figure. \n\nUnfortunately, there is no additional leverage which the Company has here because the Breaching Shareholder is not an employee/director. \n\n**(B) Process**\n**Figuring out the price to pay is one step, the next is to then consider the basis through which this can legally be carried out. Please note - the Company should first analyse its articles of association and SHA to determine any further or bespoke restrictions placed upon it. These could relate to pre-emption rights or specific restrictions on share buybacks. **\n1. A company incorporated in England and Wales may purchase its own shares pursuant to sections 690–708 of the Companies Act 2006 (the \"**CA 2006**\"). The Company's shares are not traded on a recognised investment exchange, therefore, any buyback from the Breaching Shareholder would constitute an off-market purchase under s.693 CA 2006, and the following conditions must be satisfied before that purchase can lawfully proceed.\n 1. The Company's articles of association must not prohibit a share buyback. \n 2. The terms of the proposed purchase contract must be authorised by ordinary resolution of the shareholders (being approval if 50% of the Shareholders so entitled to vote on it) before the contract is entered into (s.694(1) CA 2006). Being that this is the actual agreement between the Breaching Shareholder and the Company, a copy of the proposed contract must be made available for inspection at the Company's registered office and at the meeting itself (s.696 CA 2006). One procedural feature of the off-market purchase regime is worth noting at the outset is that the Breaching Shareholder is prohibited from voting on the resolution to approve the terms of their buyback (s.694(4) CA 2006). \n 3. The purchase price must be paid out of the company's distributable profits, or out of the proceeds of a fresh issue of shares made for the specific purpose of financing the purchase (s.692(2) CA 2006). \n 4. the Shares acquired by the Company must either be cancelled immediately upon completion (s.706 CA 2006) or held as treasury shares in accordance with s.724–732 CA 2006. In most cases for a private company in these circumstances, cancellation is the appropriate course because future investors and employees typically prefer to receive newly issued shares unencumbered by any legacy matters or nuance.\n 5. Finally, a return of the purchase must be filed at Companies House within 28 days of completion. The relevant Companies House forms are SH03 (return of purchase of own shares) and, where shares are cancelled, SH06 (notice of cancellation). The buyback contract must also be retained and made available for inspection at the registered office for 10 years from completion under s.702 CA 2006.\n\n**Options to fund the buyback (Company):**\n1. **Out of Distributable Profits**. \n 1. Section 692(2) CA 2006 is the provision that impacts whether or not the Company can execute the buyback at this stage. The purchase price in a share buyback must be paid from the company's distributable profits, or from the proceeds of a fresh share issue made specifically to fund the buyback. Distributable profits are defined by s.830 CA 2006 as a company's accumulated realised profits less its accumulated realised losses. We note that the Company has accumulated losses of £200,000 and therefore has no distributable profits/reserves\n 2. A key trap here in these circumstances, and one to emphasise, is that cash at bank and distributable profits are not the same thing. A company with cash on its balance sheet but accumulated losses has no distributable profits and cannot fund a buyback from that cash, regardless of how much it holds. Therefore, if the Company proceeded using its £100,000 in cash, this would constitute an unlawful return of capital, would render the buyback void, and would expose each director to personal liability. \n\n**2.Using the share premium account **(the** \"SPA\"). **\n 1. The share premium account arises under s.610 CA 2006 when shares are issued at a price above their nominal value and accordingly the excess is credited to the SPA rather than to the profit and loss account. It is a capital account and its application is restricted by statute. Funding a share buyback is not a permitted application of the SPA. Therefore, applying it for that purpose would constitute an unlawful reduction of capital and would therefore be void. The SPA cannot, in other words, simply be redirected to pay for the Breaching Shareholder's shares.\n 2. There is, however, an indirect route. The SPA can be eliminated through a formal capital reduction under Part 17 CA 2006 (ss.641–653). Once reduced to nil through that process, the accounting effect (confirmed by ICAEW Technical Release TECH 02/17BL) is to create a realised reserve of equivalent amount, which is then distributable and can be applied to fund a share buyback. \n 3. This capital reduction process requires, broadly:\n 1. the directors to sign a statutory solvency statement under s.642 CA 2006 confirming the Company can pay its debts for the following 12 months; and \n 2. the shareholders to pass a special resolution approving the reduction and make the necessary Companies House filings. \n 4. Unfortunately, this capital reduction process creates only £100,000 of distributable reserves which insufficient to fund a £250,000 buyback alone. If £100,000 is agreed, this is still not workable because the losses are £200,000 so there would still be retained losses of £100,000 and thus we are still not able to use this route. \n\nPlease note that each signatory to the solvency statement is personally criminally liable if they sign without reasonable grounds (s.643(4) CA 2006), and accounting advice must be taken beforehand. This is an important point for this capital reduction process because it exposes the directors to significant liability if they act incorrectly. \n\n_Note: UK company law does provide for a buyback under the \"de minimis procedure\", which permits share buyback purchases of up to the lower of £15,000 or 5% of share capital without shareholder approval. However, given the values involved here, this can be ruled out immediately._\n\n**3.Fresh Issue of Shares**\n\nSection 692(2)(b) CA 2006 permits a company to fund a buyback from the proceeds of a fresh share issue made specifically for that purpose. In principle this would get around the two issues above. However, it is highly unlikely that an investor can be found quickly and it is also unlikely that this current dispute won't give them pause. Accordingly, this option is included for completeness and is not really a viable route.\n\n**Option to fund the Buyback (Founder or another Shareholder):**\n**4.Acquisition by the Founder or another Shareholder**\nThis option may be attractive simply because it involves the Founder (or another Shareholder) purchasing the shares directly, therefore avoiding the issues outlined above with a Company buyback. However, it may be challenging because (i) this would be a personal acquisition depending on personal finances (which may also have personal taxation consequences); (ii) if the Founder is making the purchase, query how the minority shareholders will think about this boosting the Founder's shareholding and (iii) on top of that, this option itself does have some nuances, as outlined below. \n\nUnlike for public companies, private limited companies are not subject to the financial assistance prohibition under ss.677–683 CA 2006. That prohibition was relaxed for private limited companies. Unfortunately, this does not eliminate some other problems which arise were the Company to try and assist the Founder (or another Shareholder) with buying the Breaching Shareholder's shares. Firstly, under s.829 CA 2006, any distribution by a company to its members must be made out of distributable profits, which we have established are already not present. If a loan to the Founder were made on terms that are not genuinely commercial, there is a real risk that a court would characterise it not as a loan but as a distribution. If so, it would be an unlawful distribution given the that the Company has no distributable profits. The consequences are the same consequences as an unlawful buyback (being rendered void, and exposing each director to personal liability for the amount paid out).\nSecondly, under s.172 CA 2006, directors must act in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole. A loan to the Founder (or other Shareholder) at a time when the Company holds only £100,000 in cash and carries accumulated losses of £200,000 obviously requires careful justification, which is beyond the scope of this memo as it is likely a very high hurdle to clear. The directors would need to satisfy themselves that making the loan is genuinely in the Company's interests, that it would not leave the Company unable to meet its own liabilities as they fall due, and that shareholder interests have been properly considered. A loan that cannot be justified on those grounds exposes the directors to a claim for breach of duty. \nFor the avoidance of doubt, the Company taking out a loan in order to then fund a further Founder (or Shareholder) loan is also unrealistic (due to the lender's own diligence and compliance checks when reviewing the reasoning for the loan) and nevertheless problematic. Incurring a liability on the Company's balance sheet in order to fund the Founder's (or other Shareholder's) personal acquisition would be very difficult to justify under s.172 CA 2006 at a time when the Company already carries significant accumulated losses, and would expose the directors to a claim for breach of duty. \n\n**Conclusion**\nThe above clearly shows that a price needs to be agreed, and even that is complicated and not without risk. It is noted that the Company wanted to move quickly here, but unfortunately the Company cannot fund a buyback today because it has no distributable reserves, and the capital reduction route does not resolve the position either given the accumulated losses of £200,000. The Company's road to funding a buyback is therefore either:\n(1) to wait until its accounting position has improved sufficiently to generate distributable reserves that exceed the accumulated losses and cover the purchase price in full (or if the SPA remains available at that point to use a capital reduction of the SPA to top up whatever distributable reserves exist at the time, provided the combined figure is sufficient to meet the agreed price). In either case, accounting advice should be taken before proceeding to confirm the distributable position at the relevant time. They will also still need to follow the statutory procedure at that time. \n(2) The Founder should consider whether they have the personal resources (now or via borrowing) to acquire the shares directly in their personal capacity.\n(3) Equally, other shareholders could be asked if they wish to acquire the shares directly from the Breaching Shareholder, but this would be subject to their own financial circumstances. \n\nOne commercial consideration when the buyback is made (howsoever it is made), is the parties could consider structuring the buyback in tranches. This could commence the process sooner, whilst the Company builds up sufficient distributable reserves. Naturally, this still relies on some distributable reserves being available at the first payment date, so the timing is still uncertain. Furthermore, this would not produce a clean break until the payment is made in full, so some of the same risks (having the Breaching Shareholder within the business and treating them fairly) still remain.\n\nFinally, regardless of the above, the Company should take steps to protect its position in the event that the current agreement in principle breaks down. That means gathering evidence of the Breaching Shareholder's competitive activity which might support both a damages claim and any future litigation (if it gets to that). The Company should also consider whether it is in a position to restrict the Breaching Shareholder's ongoing activities in the interim. The Breaching Shareholder may cause further harm if not managed properly. For example, the Company could minimise this risk by enforcing any continuing confidentiality obligations under the SHA, requiring the return of confidential information or company property, or simply notifying the Breaching Shareholder in writing of the obligations that continue to bind them under tthe SHA. Any such steps must be taken carefully because any restrictions that go beyond what the SHA expressly permits, or that could be characterised as oppressive conduct toward a minority shareholder, also pose potential risk to the Company. \n\n**References.**\n\nCompanies Act 2006, s.610 — share premium account: . \nCompanies Act 2006, Part 18 (ss.658–737) — share buybacks: . \nCompanies Act 2006, s.641–644 — capital reduction: . \nCompanies Act 2006, s.677–683 — financial assistance: . \nCompanies Act 2006, s.692(2) — funding of share buybacks: . \nCompanies Act 2006, s.694 — off-market purchases: . \nCompanies Act 2006, s.830 — distributable profits: . \nCompanies Act 2006, s.994 — unfair prejudice: . \nICAEW Technical Release TECH 02/17BL — Distributable Profits: . \nO'Neill v Phillips [1999] UKHL 24: . \nCavendish Square Holding BV v Makdessi [2015] UKSC 67: . \nRe Sunrise Radio Ltd [2009] EWHC 2893 (Ch): .", - "Associated Rubrics": 30, - "Rubrics": [ - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "Is the answer written in a professional tone and manner?", - "justification": "The answer should reflect that this was a requirement for a legal memo which should be written professionally and not colloquially. " - }, - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "Does the answer provide multiple options and a conclusion?", - "justification": "The goal is to not provide one answer, nor is it to provide some options without any conclusion " - }, - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "Does the answer use defined terms consistently throughout?", - "justification": "Legal outputs should match legal documentation style and consistent use of defined terms is an important marker of professionalism and legal register" - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "5", - "criterion": "Does the answer correctly identify that the Company's articles of association and SHA must be reviewed for additional restrictions?", - "justification": "We have not seen these documents, but the response has to recognise that these documents may change the fact pattern substantively if they contain certain restrictions (i.e. a de minimis is a good example). " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "5", - "criterion": "Does the answer identify that the Breaching Shareholder cannot be compelled to transfer their shares in the absence of an express contractual mechanism?", - "justification": "This is crucial because the Company has to understand that it must work towards a formal and binding agreement to resolve this matter." - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "3", - "criterion": "Does the answer state that the Company has no distributable reserves and that this prevents a company-funded share buyback under s.692(2) CA 2006?", - "justification": "If this is not identified early on, the answer can include a lot of wasteful and irrelevant content" - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "5", - "criterion": "Does the answer identify the unfair prejudice risk under s.994 CA 2006 of engineering a transfer at below fair market value without contractual justification", - "justification": "Failing to identify this means failing to identify a key potential risk" - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "5", - "criterion": "Does the answer distinguish between cash at bank and distributable profit?", - "justification": " Cash at the bank and the distributable reserves are not the same thing. This is an accounting and financial point reflecting how the law does not operate in a vacuum. " - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "5", - "criterion": "Does the answer identify and explain why, despite the financial assistance prohibition no longer applying, a loan to the Founder (or Shareholder) to fund the purchase will still be unlawful?", - "justification": "Financial assistance no longer applying does not create a workaround here because it still comes back to the fact that the Company does not have distributable reserves, so it cannot pay a dividend and it would be extremely difficult to justify, document and stand behind making a loan in its financial circumstances. " - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "5", - "criterion": "Does the answer state that a settlement agreement should be drafted recording that the price was freely negotiated and that the Breaching Shareholder had the opportunity to take independent legal advice?", - "justification": "This was not explicitly asked, but is implied. Agreeing the price is one thing, the Company should now seek to protect and document this agreement suitably to avoid risk of challenge down the line" - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "1", - "criterion": "Does the answer correctly identify that the Breaching Shareholder is prohibited from voting on the resolution to approve the terms of their own buyback under s.694(4) CA 2006?", - "justification": "Th answer should provide helpful procedural points and this is a useful practical note if they are worried about passing a resolution relating to this shareholder" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer state that even after a capital reduction of the SPA, the accumulated losses of £200,000 would absorb the £100,000 reserve created, leaving the Company (still) unable to fund a buyback", - "justification": "This again highlights the commercial and practical nature of this scenario - using the capital reduction of the SPA provides extra funds, but the losses amount must still not be greater than the buyback purchase price, otherwise you are still stuck at the first hurdle of not having distributable reserves/profits. " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer identify the negotiated settlement at £100,000 as a possible route?", - "justification": "This is a practically important route that a strong answer should identify. It also has a direct funding advantage given the Company's cash position. A response that treats £250,000 as the only defensible price misses a potential commercial solution." - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer explain why the fresh issue of shares route is theoretically available but practically unviable?", - "justification": "The answer may provide options which, whilst technically possible, are just unrealistic and this is a key part of advice. Outlining a potential solution on paper is very different to outlining a viable path forward." - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer cover the link between Price and Process?", - "justification": "Being able to do the buyback is one thing, but this is still a comemrcial arrangement and so the price factor can affect how the process actually plays out" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer recommend that the Company gather and preserve evidence of the Breaching Shareholder's competitive activity to support a potential damages claim", - "justification": "Ultimately, this brings us back to the point that this is a contentious matter with additional considerations to bear in mind and represents going the extra mile outside of the brief. " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "1", - "criterion": "Does the response correctly identify that the other non-breaching minority investors could also be approached as potential personal purchasers of the Breaching Shareholder's shares", - "justification": "It is crucial to set out who can actually purchase these shares and the Founder and Company are not the only ones." - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "3", - "criterion": "Does the answer correctly state that the solvency statement can create criminal liability for signing without reasonable grounds for the opinions under s.643(4) CA 2006", - "justification": "If the capital reduction of SPA is now or in future a route, the directors who sign this solvency statement have to understand the seriousness of this commitment. " - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "1", - "criterion": "Does the answer correctly identify that shares purchased by the Company must be cancelled or held as treasury shares?", - "justification": "Important to note because it highlights process point and legal requirement. " - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "1", - "criterion": "Does the answer state that the Company taking out a loan would still not be workable?", - "justification": "Additional lending creates a liability (financial and legal on the part of the directors). It is also highly unlikely a lender will lend to a business without profits and when the purpose is to onwardly fund a breaching shareholder's exit " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the answer cite CA 2006, s.692(2) as the statutory basis for the distributable reserves requirement", - "justification": "This is the operative part of the CA 2006" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the answer cite Companies Act 2006, ss.641–644 as the statutory basis for the Capital Reduction route", - "justification": "This is the operative part of the CA 2006" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the answers cite both O'Neill v Phillips [1999] UKHL 24 and Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch) together in support of the negotiated settlement route", - "justification": "These are authorities for the position stated. " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the answer cite Cavendish Square Holding BV v Makdessi [2015] UKSC 67 in support of the proposition that any discount below fair market value must be based on a legitimate commercial interest and demonstrable loss and not a penalty", - "justification": "Authority for the position stated. " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer state that capital reduction via SPA will work straightaway?", - "justification": "This is obviously not possible based on these facts" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer recommend or advise a course of action that would constitute oppressive conduct toward the Breaching Shareholder as a minority member?", - "justification": "This creates a potential pitfall for the Company because if they mismanage this situation they risk making an already contentious situation worse" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer state that the Company can proceed with a buyback out of distributable reserves at this point in time?", - "justification": "This is obviously not possible based on these facts" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer fail to identify that fair market value is the appropriate default pricing benchmark in the absence of an express contractual mechanism?", - "justification": "It might be tempting to just say the same price of £100,000 is suitable, but this is problematic and risks creating a problem straight away" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer fail to distinguish between a company share buyback under Part 18 CA 2006 and a personal acquisition by the Founder or other shareholders?", - "justification": "Our client is the Company but it was stated that the Founder might be able to buy the shares. Nevertheless, the treatment is different for both and it must be separated out accordingly to avoid conflating the two and creating an unclear plan of action for either. " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer fail to distinguish cash in the bank from distributable profits and conflate the two", - "justification": "This is a key distinction " - } - ], - "Task Details": "Share buybacks are nuanced because there is a legal process in the UK, but sometimes the commercial realities are rather nuanced. Often corporate lawyers deal with shareholder breaches and company disputes. However this hinges on the lawyers and the finance professional working together to understand the financial and legal mechanics of a buyback actually being possible. The key is to try and offer up alternative solutions and to understand the flexibility of this task based ont he financial situation of the company.", - "Reference Materials": "https://www.legislation.gov.uk/ukpga/2006/46/contents", - "Realistic Task": 3, - "Realistic Explanation": "This is a common scenario - breaching SH, company wanting to act but the financials creating a barrier.", - "Difficult Task": 3, - "Difficulty Explanation": "I think lawyers and I suspect perhaps AI may get a bit lost with the right path forward. The numbers may need changing - the point is that it might not be possible to do the share buyback, so perhaps it falls on the Founder to somehow do this (which again is not so straightforward). The AI might force a solution, but the best solution might be to wait" - }, - "Version 2": { - "Prompt": "You are a corporate lawyer in England and Wales. An England and Wales incorporated private limited company requires assistance as follows: The Client has one majority shareholder (75% holding), and 3 other investors, all party to a shareholders agreement. One investor (10% shareholder, not a director or employee) has breached the terms of the shareholders' agreement by working for a competitor. The founder has notified the breaching shareholder and they agree they should separate. Accordingly, the founder and/or Company want to quickly remove them and buy back their shares. The Company has only one class of shares and all are fully paid up. SHA contains no express compulsory transfer provision, bad leaver clause, or price mechanism to fall back on an utilise in this breach scenario. They previously bought their shares for 100,000 GBP, but a latest valuation has their shares valued at 250,000. The founder has other business interests so wants to manage this carefully and lawfully. \nThe Company has 100,00 GBP in its bank account, but does not have distributable reserves, only retained losses of 200,000. It has a share premium account with funds of 120,000 in it. The Founder has confirmed that the commercial pipeline is good, with some pending customer negotiations looking to close in the coming months. Analyse and report the options for this business and what might act as a blocker for each option. Present the founder of the Company with a legal memo, outlining the basis for which they should agree a reasonable and defendable price for the share buyback and outline a structured list of options for them to remove this shareholder. Please provide sources and verifiable public resources from which you have based your response. Please also consider whether the founder can also act as the purchasing conduit or if the Company can support this shareholders' acquisition in a lawful way.", - "Gold Response": "**Background**\nWe have been asked to set out some advice to the founder of a company incorporated in England and Wales (the \"**Company**\"). We understand that the Company has one majority shareholder (the \"**Founder**\") holding 75% fully paid up shares (same class as all shareholders) and three minority investors, all of which are party to a shareholders' agreement (the \"**SHA**\"). The problem requiring assistance is that one minority investor (10% shareholding) has breached the SHA by working for a competitor(the \"**Breaching Shareholde**r\"). The SHA contains no express provisions, but it still must be reviewed in full (alongside the articles of association) before the Company takes any steps. \n\n**Executive Summary**\nThe analysis below sets out the position for the Company, but in short, a buyback of the Breaching Shareholder's shares by the Company is not possible at this stage. The parties should first negotiate a settlement based on a suitable valuation metric and taking into consideration the nature of the breach and then consider whether the Founder can acquire these shares directly through self-financing. \n\n**Analysis**\nThere are two key pillars here: price(because this is a key commercial factor which impacts the legals), and then process (because we need to outline the mechanics which may or may not be available).\n\n**(A) Price to pay for the Breaching Shareholders' Shares**\nWith the SHA being silent on price, we have to consider what price to actually agree. There is also no single correct answer on value, because each valuation methodology (i.e. such as multiple of profits, market comparables etc.) can each produce a materially different figure for the same company, and none is inherently more correct than another. The parties likely have to each take independent valuation advice, and the Board should be prepared for a range rather than a single number.\n\nIn any event, it goes without saying that the Company's financial position is crucial. It holds £100,000 cash at bank and a share premium account of just over £100,000, but carries accumulated losses of £200,000 and therefore has no distributable reserves. The Breaching Shareholder originally acquired their shares for £100,000 and the current independent valuation values them now at £250,000. These figures have a large impact on the analysis and options below because the financial health of the Company creates some material blockers. \n\nFrom a legal perspective, the Company cannot necessarily force a price because the Breaching Shareholder breached the SHA. A departing shareholder retains their membership rights and the protections that attach to them until their shares are validly transferred or cancelled, irrespective of the breach. Under s.994 CA 2006, any shareholder may petition the court on grounds of unfairly prejudicial conduct, and the courts have consistently held that a forced transfer at a price that does not reflect fair market value can support such a petition. In O'Neill v Phillips [1999] UKHL 24, Lord Hoffmann confirmed that (i) the appropriate measure in a buyout context is ordinarily the fair value of the shares on a pro rata basis, without minority discount and (ii) that exclusion of a shareholder from management without a reasonable offer to purchase their shares will likely constitute unfair prejudice. If fair value cannot be agreed between the parties, it should be determined by a competent independent expert. Therefore, a transfer at the original acquisition cost of £100,000 (against a current valuation of £250,000), without any contractual basis for that differential, creates a risk for the Company.\n\nA negotiated discount below fair market value can still be possible, but either:\n 1. it requires justification linked to a quantifiable loss caused by the breach (rather than to the fact of breach itself). The relevant constraint is the unfair prejudice jurisdiction under s.994 CA 2006: a below-market price imposed without proper justification exposes the Company to a petition by the Breaching Shareholder. Any discount should therefore be documented by reference to specific, demonstrable loss.\n 2. requires a negotiated settlement at that figure, agreed by the Breaching Shareholder. Where a shareholder voluntarily agrees a price and transfers their shares on that basis, they cannot subsequently petition for unfair prejudice by reference to that price because the transfer was consensual, and the agreed consideration reflects the parties' own commercial resolution of the matter (O'Neill v Phillips [1999] UKHL 24 and Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch)). If the competitive activity has caused quantifiable loss to the company such as damage to a commercial relationship, diversion of business opportunities, or costs incurred in consequence of the breach, those claims have real value as negotiating leverage. A settlement at £100,000 (being the price originally paid) in exchange for a full release of all such claims, combined with a clean exit and the avoidance of protracted litigation, may be an outcome the Breaching Shareholder is willing to accept, particularly if the Company's damages claim is backed up. \nHowever, with regards to a negotiated settlement, the parties will need to negotiate a settlement agreement, recording that the price was freely negotiated, that the Breaching Shareholder received or had the opportunity to take independent legal advice, and that the agreed consideration reflects a full and final resolution of all claims between the parties. That should hedge against any claims of unfairness down the line. \n\nWhilst a fair market value (£250,000 on the current valuation) remains the appropriate and most defensible benchmark where no settlement at a lower figure can be achieved, there is a basis to negotiate price. Whatever price is ultimately agreed, the Board, having mind to their directorial duties, should pass a formal resolution recording the valuation evidence relied upon and the commercial rationale for the agreed figure. \n\nUnfortunately, there is no additional leverage which the Company has here because the Breaching Shareholder is not an employee/director. \n\n**(B) Process**\n**Figuring out the price to pay is one step, the next is to then consider the basis through which this can legally be carried out. Please note - the Company should first analyse its articles of association and SHA to determine any further or bespoke restrictions placed upon it. These could relate to pre-emption rights or specific restrictions on share buybacks. **\n1. A company incorporated in England and Wales may purchase its own shares pursuant to sections 690–708 of the Companies Act 2006 (the \"**CA 2006**\"). The Company's shares are not traded on a recognised investment exchange, therefore, any buyback from the Breaching Shareholder would constitute an off-market purchase under s.693 CA 2006, and the following conditions must be satisfied before that purchase can lawfully proceed.\n 1. The Company's articles of association must not prohibit a share buyback. \n 2. The terms of the proposed purchase contract must be authorised by ordinary resolution of the shareholders (being approval if 50% of the Shareholders so entitled to vote on it) before the contract is entered into (s.694(1) CA 2006). Being that this is the actual agreement between the Breaching Shareholder and the Company, a copy of the proposed contract must be made available for inspection at the Company's registered office and at the meeting itself (s.696 CA 2006). One procedural feature of the off-market purchase regime is worth noting at the outset is that the Breaching Shareholder is prohibited from voting on the resolution to approve the terms of their buyback (s.694(4) CA 2006). \n 3. The purchase price must be paid out of the company's distributable profits, or out of the proceeds of a fresh issue of shares made for the specific purpose of financing the purchase (s.692(2) CA 2006). \n 4. the Shares acquired by the Company must either be cancelled immediately upon completion (s.706 CA 2006) or held as treasury shares in accordance with s.724–732 CA 2006. In most cases for a private company in these circumstances, cancellation is the appropriate course because future investors and employees typically prefer to receive newly issued shares unencumbered by any legacy matters or nuance.\n 5. Finally, a return of the purchase must be filed at Companies House within 28 days of completion. The relevant Companies House forms are SH03 (return of purchase of own shares) and, where shares are cancelled, SH06 (notice of cancellation). The buyback contract must also be retained and made available for inspection at the registered office for 10 years from completion under s.702 CA 2006.\n\n**Options to fund the buyback (Company):**\n1. **Out of Distributable Profits**. \n 1. Section 692(2) CA 2006 is the provision that impacts whether or not the Company can execute the buyback at this stage. The purchase price in a share buyback must be paid from the company's distributable profits, or from the proceeds of a fresh share issue made specifically to fund the buyback. Distributable profits are defined by s.830 CA 2006 as a company's accumulated realised profits less its accumulated realised losses. We note that the Company has accumulated losses of £200,000 and therefore has no distributable profits/reserves\n 2. A key trap here in these circumstances, and one to emphasise, is that cash at bank and distributable profits are not the same thing. A company with cash on its balance sheet but accumulated losses has no distributable profits and cannot fund a buyback from that cash, regardless of how much it holds. Therefore, if the Company proceeded using its £100,000 in cash, this would constitute an unlawful return of capital, would render the buyback void, and would expose each director to personal liability. \n\n**2.Using the share premium account **(the** \"SPA\"). **\n 1. The share premium account arises under s.610 CA 2006 when shares are issued at a price above their nominal value and accordingly the excess is credited to the SPA rather than to the profit and loss account. It is a capital account and its application is restricted by statute. Funding a share buyback is not a permitted application of the SPA. Therefore, applying it for that purpose would constitute an unlawful reduction of capital and would therefore be void. The SPA cannot, in other words, simply be redirected to pay for the Breaching Shareholder's shares.\n 2. There is, however, an indirect route. The SPA can be eliminated through a formal capital reduction under Part 17 CA 2006 (ss.641–653). Once reduced to nil through that process, the accounting effect (confirmed by ICAEW Technical Release TECH 02/17BL) is to create a realised reserve of equivalent amount, which is then distributable and can be applied to fund a share buyback. \n 3. This capital reduction process requires, broadly:\n 1. the directors to sign a statutory solvency statement under s.642 CA 2006 confirming the Company can pay its debts for the following 12 months; and \n 2. the shareholders to pass a special resolution approving the reduction and make the necessary Companies House filings. \n 4. Unfortunately, this capital reduction process creates only £100,000 of distributable reserves which insufficient to fund a £250,000 buyback alone. If £100,000 is agreed, this is still not workable because the losses are £200,000 so there would still be retained losses of £100,000 and thus we are still not able to use this route. \n\nPlease note that each signatory to the solvency statement is personally criminally liable if they sign without reasonable grounds (s.643(4) CA 2006), and accounting advice must be taken beforehand. This is an important point for this capital reduction process because it exposes the directors to significant liability if they act incorrectly. \n\n_Note: UK company law does provide for a buyback under the \"de minimis procedure\", which permits share buyback purchases of up to the lower of £15,000 or 5% of share capital without shareholder approval. However, given the values involved here, this can be ruled out immediately._\n\n**3.Fresh Issue of Shares**\n\nSection 692(2)(b) CA 2006 permits a company to fund a buyback from the proceeds of a fresh share issue made specifically for that purpose. In principle this would get around the two issues above. However, it is highly unlikely that an investor can be found quickly and it is also unlikely that this current dispute won't give them pause. Accordingly, this option is included for completeness and is not really a viable route.\n\n**Option to fund the Buyback (Founder or another Shareholder):**\n**4.Acquisition by the Founder or another Shareholder**\nThis option may be attractive simply because it involves the Founder (or another Shareholder) purchasing the shares directly, therefore avoiding the issues outlined above with a Company buyback. However, it may be challenging because (i) this would be a personal acquisition depending on personal finances (which may also have personal taxation consequences); (ii) if the Founder is making the purchase, query how the minority shareholders will think about this boosting the Founder's shareholding and (iii) on top of that, this option itself does have some nuances, as outlined below. \n\nUnlike for public companies, private limited companies are not subject to the financial assistance prohibition under ss.677–683 CA 2006. That prohibition was relaxed for private limited companies. Unfortunately, this does not eliminate some other problems which arise were the Company to try and assist the Founder (or another Shareholder) with buying the Breaching Shareholder's shares. Firstly, under s.829 CA 2006, any distribution by a company to its members must be made out of distributable profits, which we have established are already not present. If a loan to the Founder were made on terms that are not genuinely commercial, there is a real risk that a court would characterise it not as a loan but as a distribution. If so, it would be an unlawful distribution given the that the Company has no distributable profits. The consequences are the same consequences as an unlawful buyback (being rendered void, and exposing each director to personal liability for the amount paid out).\nSecondly, under s.172 CA 2006, directors must act in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole. A loan to the Founder (or other Shareholder) at a time when the Company holds only £100,000 in cash and carries accumulated losses of £200,000 obviously requires careful justification, which is beyond the scope of this memo as it is likely a very high hurdle to clear. The directors would need to satisfy themselves that making the loan is genuinely in the Company's interests, that it would not leave the Company unable to meet its own liabilities as they fall due, and that shareholder interests have been properly considered. A loan that cannot be justified on those grounds exposes the directors to a claim for breach of duty. \nFor the avoidance of doubt, the Company taking out a loan in order to then fund a further Founder (or Shareholder) loan is also unrealistic (due to the lender's own diligence and compliance checks when reviewing the reasoning for the loan) and nevertheless problematic. Incurring a liability on the Company's balance sheet in order to fund the Founder's (or other Shareholder's) personal acquisition would be very difficult to justify under s.172 CA 2006 at a time when the Company already carries significant accumulated losses, and would expose the directors to a claim for breach of duty. \n\nOne practical point to note is that given this would be a transfer of shares, a duly signed stock transfer form would required and stamp duty of 0.5% of the purchase price must be paid to HMRC by the actual purchaser. Details can be found here: \n\n**Conclusion**\nThe above clearly shows that a price needs to be agreed, and even that is complicated and not without risk. It is noted that the Company wanted to move quickly here, but unfortunately the Company cannot fund a buyback today because it has no distributable reserves, and the capital reduction route does not resolve the position either given the accumulated losses of £200,000. The Company's road to funding a buyback is therefore either:\n(1) to wait until its accounting position has improved sufficiently to generate distributable reserves that exceed the accumulated losses and cover the purchase price in full (or if the SPA remains available at that point to use a capital reduction of the SPA to top up whatever distributable reserves exist at the time, provided the combined figure is sufficient to meet the agreed price). In either case, accounting advice should be taken before proceeding to confirm the distributable position at the relevant time. They will also still need to follow the statutory procedure at that time. \n(2) The Founder should consider whether they have the personal resources (now or via borrowing) to acquire the shares directly in their personal capacity.\n(3) Equally, other shareholders could be asked if they wish to acquire the shares directly from the Breaching Shareholder, but this would be subject to their own financial circumstances. \n\nOne commercial consideration when the buyback is made (howsoever it is made), is the parties could consider structuring the buyback in tranches. This could commence the process sooner, whilst the Company builds up sufficient distributable reserves. Naturally, this still relies on some distributable reserves being available at the first payment date, so the timing is still uncertain. Furthermore, this would not produce a clean break until the payment is made in full, so some of the same risks (having the Breaching Shareholder within the business and treating them fairly) still remain.\n\nFinally, regardless of the above, the Company should take steps to protect its position in the event that the current agreement in principle breaks down. That means gathering evidence of the Breaching Shareholder's competitive activity which might support both a damages claim and any future litigation (if it gets to that). The Company should also consider whether it is in a position to restrict the Breaching Shareholder's ongoing activities in the interim. The Breaching Shareholder may cause further harm if not managed properly. For example, the Company could minimise this risk by enforcing any continuing confidentiality obligations under the SHA, requiring the return of confidential information or company property, or simply notifying the Breaching Shareholder in writing of the obligations that continue to bind them under the SHA. Any such steps must be taken carefully because any restrictions that go beyond what the SHA expressly permits, or that could be characterised as oppressive conduct toward a minority shareholder, also pose potential risk to the Company. \n\n**References.**\n\nCompanies Act 2006, s.610 — share premium account: . \nCompanies Act 2006, Part 18 (ss.658–737) — share buybacks: . \nCompanies Act 2006, s.641–644 — capital reduction: . \nCompanies Act 2006, s.677–683 — financial assistance: . \nCompanies Act 2006, s.692(2) — funding of share buybacks: . \nCompanies Act 2006, s.694 — off-market purchases: . \nCompanies Act 2006, s.830 — distributable profits: . \nCompanies Act 2006, s.994 — unfair prejudice: . \nICAEW Technical Release TECH 02/17BL — Distributable Profits: . \nO'Neill v Phillips [1999] UKHL 24: . \nCavendish Square Holding BV v Makdessi [2015] UKSC 67: . \nRe Sunrise Radio Ltd [2009] EWHC 2893 (Ch): . \nhttps://www.gov.uk/guidance/pay-stamp-duty", - "Associated Rubrics": 30, - "Rubrics": [ - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "Does the answer use defined terms consistently throughout?", - "justification": "Legal outputs should match legal documentation style and consistent use of defined terms is an important marker of professionalism and legal register" - }, - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "Is the answer written in a professional tone and manner consistent with that of a legal memo written by a legal professional?", - "justification": "The answer should reflect that this was a requirement for a legal memo which should be written professionally and not colloquially. " - }, - { - "rubric_category": "Structure & Style Rubric", - "score_option": "5", - "criterion": "Does the answer provide multiple options and a conclusion?", - "justification": "The goal is to not provide one answer, nor is it to provide some options without any conclusion " - }, - { - "rubric_category": "Substance Rubric - Explicit requirements", - "score_option": "5", - "criterion": "Does the answer correctly identify that the Company's articles of association and SHA must be reviewed for additional restrictions?", - "justification": "We have not seen these documents, but the response has to recognise that these documents may change the fact pattern substantively if they contain certain restrictions (i.e. a de minimis is a good example). " - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "5", - "criterion": "Does the answer state that a settlement agreement should be drafted recording that the price was freely negotiated and that the Breaching Shareholder had the opportunity to take independent legal advice?", - "justification": "This was not explicitly asked, but is implied. Agreeing the price is one thing, the Company should now seek to protect and document this agreement suitably to avoid risk of challenge down the line" - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "5", - "criterion": "Does the answer distinguish between cash at bank and distributable profit?", - "justification": " Cash at the bank and the distributable reserves are not the same thing. This is an accounting and financial point reflecting how the law does not operate in a vacuum. " - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "5", - "criterion": "Does the answer identify the unfair prejudice risk under s.994 CA 2006 of engineering a transfer at below fair market value without contractual justifications", - "justification": "Failing to identify this means failing to identify a key potential risk" - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "5", - "criterion": "Does the answer explain the reason why despite the financial assistance prohibition no longer applying, a loan to the Founder (or Shareholder) to fund the purchase will still be unlawful?", - "justification": "Financial assistance no longer applying does not create a workaround here because it still comes back to the fact that the Company does not have distributable reserves, so it cannot pay a dividend and it would be extremely difficult to justify, document and stand behind making a loan in its financial circumstances. " - }, - { - "rubric_category": "Substance Rubric - Implicit expectations", - "score_option": "1", - "criterion": "Does the answer correctly identify that the Breaching Shareholder is prohibited from voting on the resolution to approve the terms of their own buyback under s.694(4) CA 2006?", - "justification": "Th answer should provide helpful procedural points and this is a useful practical note if they are worried about passing a resolution relating to this shareholder" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer cover the link between Price and Process?", - "justification": "Being able to do the buyback is one thing, but this is still a comemrcial arrangement and so the price factor can affect how the process actually plays out" - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer identify the negotiated settlement at £100,000 as a possible route?", - "justification": "This is a practically important route that a strong answer should identify. It also has a direct funding advantage given the Company's cash position. A response that treats £250,000 as the only defensible price misses a potential commercial solution." - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer recommend that the Company gather and preserve evidence of the Breaching Shareholder's competitive activity to support a potential damages claim?", - "justification": "Ultimately, this brings us back to the point that this is a contentious matter with additional considerations to bear in mind and represents going the extra mile outside of the brief. " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer state that even after a capital reduction of the SPA, the Company will not be able to fund a buyback since the accumulated losses of £200,000 would absorb the £100,000 reserve created", - "justification": "This again highlights the commercial and practical nature of this scenario - using the capital reduction of the SPA provides extra funds, but the losses amount must still not be greater than the buyback purchase price, otherwise you are still stuck at the first hurdle of not having distributable reserves/profits. " - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "5", - "criterion": "Does the answer explain why the fresh issue of shares route is theoretically available but practically unviable?", - "justification": "The answer may provide options which, whilst technically possible, are just unrealistic and this is a key part of advice. Outlining a potential solution on paper is very different to outlining a viable path forward." - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "1", - "criterion": "Does the response correctly identify that the other non-breaching minority investors could also be approached as potential personal purchasers of the Breaching Shareholder's shares?", - "justification": "It is crucial to set out who can actually purchase these shares and the Founder and Company are not the only ones." - }, - { - "rubric_category": "Substance Rubric - Reasoning quality", - "score_option": "1", - "criterion": "Does the answer state that the Company taking out a loan would still not be workable?", - "justification": "Additional lending creates a liability (financial and legal on the part of the directors). It is also highly unlikely a lender will lend to a business without profits and when the purpose is to onwardly fund a breaching shareholder's exit " - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "5", - "criterion": "Does the answer identify that the Breaching Shareholder cannot be compelled to transfer their shares in the absence of an express contractual mechanism?", - "justification": "This is crucial because the Company has to understand that it must work towards a formal and binding agreement to resolve this matter." - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "3", - "criterion": "Does the answer state that the Company has no distributable reserves and that this prevents a company-funded share buyback under s.692(2) CA 2006?", - "justification": "If this is not identified early on, the answer can include a lot of wasteful and irrelevant content" - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "3", - "criterion": "Does the answer state that the solvency statement can create criminal liability for signing without reasonable grounds under s.643(4) CA 2006?", - "justification": "If the capital reduction of SPA is now or in future a route, the directors who sign this solvency statement have to understand the seriousness of this commitment. " - }, - { - "rubric_category": "Substance Rubric - Legal correctness", - "score_option": "1", - "criterion": "Does the answer correctly identify that shares purchased by the Company must be cancelled or held as treasury shares?", - "justification": "Important to note because it highlights process point and legal requirement. " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the answer cite Companies Act 2006, ss.641–644 as the statutory basis for the Capital Reduction route?", - "justification": "This is the operative part of the CA 2006" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the answer cite Cavendish Square Holding BV v Makdessi [2015] UKSC 67 to infer that any discount below fair market value must be based on a legitimate commercial interest and demonstrable loss?", - "justification": "Authority for the position stated. " - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the answer cite CA 2006, s.692(2) as the statutory basis for the distributable reserves requirement?", - "justification": "This is the operative part of the CA 2006" - }, - { - "rubric_category": "Sources and References Rubric", - "score_option": "5", - "criterion": "Does the answers cite both O'Neill v Phillips [1999] UKHL 24 and Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch) together in support of the negotiated settlement route?", - "justification": "These are authorities for the position stated. " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer state that capital reduction via share premium account will work straightaway?", - "justification": "This is obviously not possible based on these facts" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer recommend or advise a course of action that would constitute oppressive conduct toward the Breaching Shareholder as a minority member?", - "justification": "This creates a potential pitfall for the Company because if they mismanage this situation they risk making an already contentious situation worse" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer fail to distinguish between a company share buyback under Part 18 CA 2006 and a personal acquisition by the Founder or other shareholders?", - "justification": "Our client is the Company but it was stated that the Founder might be able to buy the shares. Nevertheless, the treatment is different for both and it must be separated out accordingly to avoid conflating the two and creating an unclear plan of action for either. " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer fail to distinguish cash in the bank from distributable profits and conflate the two?", - "justification": "This is a key distinction " - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer fail to identify that fair market value is the appropriate default pricing benchmark in the absence of an express contractual mechanism?", - "justification": "It might be tempting to just say the same price of £100,000 is suitable, but this is problematic and risks creating a problem straight away" - }, - { - "rubric_category": "Negative Rubric", - "score_option": "-5", - "criterion": "Does the answer state that the Company can proceed with a buyback out of distributable reserves at this point in time?", - "justification": "This is obviously not possible based on these facts" - } - ], - "Task Details": "Share buybacks are nuanced because there is a legal process in the UK, but sometimes the commercial realities are rather nuanced. Often corporate lawyers deal with shareholder breaches and company disputes. However this hinges on the lawyers and the finance professional working together to understand the financial and legal mechanics of a buyback actually being possible. The key is to try and offer up alternative solutions and to understand the flexibility of this task based on the financial situation of the company.", - "Reference Materials": "https://www.legislation.gov.uk/ukpga/2006/46/contents", - "Realistic Task": 3, - "Realistic Explanation": "This is a common scenario - breaching SH, company wanting to act but the financials creating a barrier.", - "Difficult Task": 3, - "Difficulty Explanation": "I think lawyers and I suspect perhaps AI may get a bit lost with the right path forward. The numbers may need changing - the point is that it might not be possible to do the share buyback, so perhaps it falls on the Founder to somehow do this (which again is not so straightforward). The AI might force a solution, but the best solution might be to wait" - } - } -} \ No newline at end of file