The Superior Court issued a surprising decision this summer concerning the determination of the value of shares in the context of a purchase under a shareholder agreement. In this case, following the second loan of Société Innovatech du Sud du Québec ("Innovatech") to Signaflex Inc. ("Signaflex"), ("Innovatech") to Signaflex Inc. ("Signafl ex"), its first loan had been converted into shares and a shareholder agreement had been entered into, which granted to Innovatech the right to request that its shares be purchased (the "option") at a price per share equal to the higher of (1) the highest price paid for any share by "quiconque" ("any person") during the three preceding fiscal years (the "reference Period") (sec. 9.1.1.1) and (2) the fair market value of the shares at the time the option was exercised (sec. 9.1.1.2), as established by an independent expert (the "Agreement").
When Innovatech exercised the Option, since Signaflex had issued no other shares during the Reference Period, it put Signaflex on notice to pay to it an amount of $11,455,287, calculated according to section 9.1.1.1 of the Agreement, such amount being equal to the amount of its 2011 investment.
The main issue raised was the determination of the price at which Signaflex was required to purchase Innovatech's shares. Signaflex maintained that the expression "quiconque" referred to a party not yet identified as of the time at which the Agreement was executed and excluded Innovatech. For its part, Innovatech argued that it was included in the term "quiconque" and that its second loan had to be taken into account in determining the price of the shares.
Although the common meaning of the word "quiconque" is "any person", by analyzing the intent of the parties at the time the Agreement was executed and reviewing the nature and context in which the term was used, the judge concluded that the second loan of Innovatech had been made in a context where it had been anticipated that other investors would inject funds into Signaflex and that therefore, the term "quiconque" was referring to one or several other possible investors and not to either of the parties to the Agreement. Since no investment had been made during the Reference Period, other than that of Innovatech, the Court decided that the purchase price could not be determined under section 9.1.1.1 of the Agreement. This interpretation undoubtedly surprised Innovatech, but not nearly as much as what followed...
Considering that Innovatech had, according to the Court, voluntarily ignored the only accounting report made, which stated that the fair market value of its shares was between 2.2 and 2.9 million dollars, that it had not requested a supplemental report or even a new report and that Innovatech had always maintained that the value of its shares had to be determined under section 9.1.1.1, the Court decided that section 9.1.1.2 could not apply in the circumstances. In the opinion of the Court, Innovatech had knowingly chosen not to rely on the mechanism provided under section 9.1.1.2 and there was no reason to reopen the hearing or request that a new report be prepared. The Court added that Innovatech had the burden to demonstrate the value of its shares, which it failed to do. The Court therefore dismissed the claim of in excess of $11 million and fixed the purchase price of the shares at $0! The decision has not been appealed.
Upon reading this decision, we realize once more that the words used in a contract must be chosen with care and that it is crucial to carefully defi ne the terms used when they may be interpreted in several ways. The judgment also teaches us that a party exercising a contractual right must be prudent in devising its strategy since in law, things are not always as obvious as they seem to be.
Footnotes
1 *Société Innovatech du Sud du Québec c. Signaflex inc., 2012 QCCS 3275.
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