Caution above all: pending litigation clauses in share transfer agreements

The Supreme Court expressed its opinion on the possibility of concluding such arrangements in judgment No. 27 Cdo 3366/2021. In the case at issue, the transferor in a share transfer agreement represented that there were no pending judicial or other proceedings involving the company being sold, with the exception of three proceedings. For those three proceedings, the transferor undertook that should the courts rule to the effect that the company would incur a liability, the transferor would pay that liability instead of the company. The transferee thus wanted to protect their investment in the company because should the company lose in one of the legal proceedings, its assets would be reduced.

After signing the transfer agreement, the company lost one of the litigations and was ordered to pay money to the other party. In response, the company called upon the transferor to fulfil their obligation under the share transfer agreement. However, the transferor did not grant the company's requests. A lawsuit followed. The first-degree court sided with the company and ordered the transferor to pay the amount, as the arrangement in the contract corresponded to the concept of a contract in favour of a third party under the Civil Code: as it had been agreed that the performance would not be provided to the other contracting party (i.e., the transferee), but to the company being purchased. The first-degree court also held that this contractual provision was not invalid and that the will of the parties was not contrary to the contractual arrangement. However, the court of appeal dismissed the lawsuit, stating that the company was not entitled to the payment of the amount and that the provision was not in favour of the company.

The case proceeded to the Supreme Court, which mainly dealt with the question whether the appellate court had departed from the will of the parties when interpreting the contractual provision. The Supreme Court stated that the will of the acting party, which must have been known to the other party, is important for the interpretation of the contract. The court made it clear that the value of the share in the company depended on the value of its assets. Therefore, if damage were caused to the company, this would also be reflected in the decrease in the value of the shares. The Supreme Court therefore vacated the decision of the appellate court and referred the case back to it for further proceedings. We can thus conclude that in view of case law, similar clauses in share transfer agreements should stand, but the contracting parties must take extra care when formulating them.