Enforcing the Sale of Private Company Shares

Specific performance rather than damages may be awarded by a court for the breach of an oral agreement to sell the shares of a private company because such shares may not be readily available on the market and valuation can be difficult.

The case of UBS Securities Canada, Inc. v. Sands Brothers Canada, Ltd., 95 O.R. (3d) 93, provides some insight into agreements for the purchase and sale of private company shares.   

In the UBS case, the plaintiff securities dealer wished to buy the shares of the private company then operating the Montreal Stock Exchange which were held by the defendant, a shell company with no assets other than the shares which were held in New York City. The plaintiff claimed that it had a binding oral purchase and sale agreement with the defendant which had been made between one of the plaintiff’s securities traders and a director, officer and principal of the defendant. In reliance upon that agreement, the plaintiff agreed to sell some of the purchased shares to a third party. Before the closing date of the agreement, the private company announced that it was listing its shares, and the defendant then asserted that no binding agreement had been reached and the defendant refused to deliver the shares.

The plaintiff brought an application for a declaration that the defendant had agreed to sell the shares, and for specific performance of the agreement. The trial judge found that an oral agreement had been reached and ordered that the agreement be specifically performed. The defendant’s appeal of the trial decision was dismissed by the Ontario Court of Appeal.

The Court of Appeal upheld the trial judge’s findings that an agreement had been reached and that the essential terms were the price, quantity of shares and closing date. A written share purchase agreement was held not to be a condition of the transaction but merely an indication of the manner in which the agreement already made was to be implemented. In approving the order for specific performance, the Court of Appeal upheld the trial judge’s finding that the shares were unique, and prior to their public listing, there was no readily available substitute for them. The Court of Appeal also held that it was appropriate for the trial judge to consider the defendant’s financial position since the defendant’s ability to pay damages is relevant as to whether an award of damages would be an adequate remedy in the circumstances. 

In upholding the finding of an enforceable agreement, the Court of Appeal summarized the principles of contract formation (at pages 102 and 103) as follows: 

For a contract to exist, there must be a meeting of minds, commonly referred to as consensus ad idem. The test as to whether there has been a meeting of the minds is an objective one – would an objective, reasonable bystander conclude that, in all circumstances, the parties intended to contract? As intention alone is insufficient to create an enforceable agreement, it is necessary that the essential terms of the agreement are also sufficiently certain. However, an agreement is not incomplete simply because it calls for the execution of further documents. 

In reviewing the trial judge’s order of specific performance of the agreement, the Court of Appeal summarized (at page 114) the legal principles applicable to remedies for breach of contract as follows:

When fashioning a remedy for a breach of contract, the object is to place the injured party in the position that he or she would have been had the contract been performed. Typically, damages are ordered. However, where damages are inadequate to compensate an injured party for its losses, specific performance may be ordered. Accordingly, specific performance may be ordered where the subject matter of a bargain is unique or irreplaceable because, in those circumstances, damages may be inadequate.

In its discussion of specific performance in the context of share purchase agreements, the Court of Appeal (at page 115) stated as follows:

Specific performance may be ordered in connection with the shares of a private company because, as in the present case, such shares may not be readily available on the market and valuation can be difficult. Contracts for the sale of publicly traded shares are also candidates for specific performance in circumstances such as those of the present case where the vendor is subject to an injunction restraining it from selling the shares, the purchaser has diligently pursued its claim for specific performance from the outset, and the plaintiff has entered into additional contracts for the resale of some of the shares … The uniqueness of the property that is the subject of the contract is one, non-determinative factor in deciding the appropriateness of specific performance. The underlying principle is that if the property is unique, it should be delivered up because damages would have not put the party in the position they would have been in but for the breach.

In other words, in light of the UBS case, if a seller fails to close on a purchase and sale transaction involving the shares of a private company, the seller may be forced to transfer and deliver the actual shares to the buyer rather than paying monetary compensation instead.