Originally published July 2005
This is a case comment on the Ontario Court of Appeal’s February 23, 2005 decision in BNY Capital Corp v. Katotakis (2005), 1 B.L.R. (4th) 168.
The decision concerns rights of first refusal in a shareholders’ agreement. It stands for the proposition that "superior proposal" conditions in selling notices are not contrary to rights of first refusal.
BNY Capital v. Katotakis arose from a shareholders’ agreement between Stamos Katotakis, William Waters, together with their corporate entities, and BNY Capital Corporation. Between them, they held over 80% of the shares of Financial Models Company Inc. The shareholders’ agreement contained rights of first refusal and rights of first offer with respect to the shares in Financial Models.
Financial Models was a take-over target. A company called Linedata Services SA was interested in acquiring a significant interest. Waters and BNY delivered selling notices pursuant to the shareholders’ agreement offering to sell their shares to Katotakis at a price of $12.20 per share. Waters and BNY did so on "terms and conditions … substantially in accordance with the terms and conditions set forth in ‘a draft acquisition agreement between Financial Models and Linedata and in a draft lock-up agreement between Waters, BNY and Linedata’ to the extent applicable" to Katotakis.
Both the acquisition agreement and the lock-up agreement contained "superior proposal" conditions that permitted the sellers to sell their shares to another buyer at a better price, provided that the initial buyer was given notice of the superior proposal and the opportunity to match or better it.
Katotakis delivered acceptances to the selling notices, including all the terms and conditions contained in them. He also made a take-over bid for the rest of the shares, as required by the shareholders’ agreement and securities laws. Linedata subsequently delivered a further proposal to purchase the shares at $14.50 per share. Waters and BNY gave Katotakis notice of Linedata’s superior proposal, but Katotakis made no further offer.
Between the Superior Court hearing and the Court of Appeal hearing, another company, SS & C Technologies Inc., expressed an intention to make a bid for the shares of Financial Models at a price of $17.50 per share.
Whether the superior proposal conditions applied to Katotakis’ acceptance of the Waters and BNY offer.
Katotakis argued that the superior proposal conditions did not apply and he was entitled to specific performance of his acceptance of Waters and BNY’s offer to sell the shares at $12.20. He argued that the rights of first refusal provision was intended to work such that if he matched the first third party offer for Waters and BNY shares, he was entitled to the shares at that price.
Waters and BNY argued that the superior proposal conditions applied to Katotakis’ acceptance of the selling notices and that, as he failed to match Linedata’s $14.50 per share offer, they were free to tender their shares to that offer.
The Court of Appeal decided that shareholders in the position of Waters and BNY who wanted to sell their shares were entitled, subject to any contractual provisions to the contrary, to take steps to maximize the value of their holdings and the holdings of the minority shareholders.
The Court noted that to accept Katotakis’ arguments would be to find that he had the right to cut off the process and reap all the benefits from the subsequent bidding for himself. This did not follow from the terms of the relevant agreements and documents, and would be contrary to commercial reality and good sense.
The shareholders’ agreement explicitly permitted the seller to include "any other terms and conditions not contrary to the provisions of [the rights of first refusal and rights of first offer article in the shareholders’ agreement]." The Court gave full effect to that language so as to allow Waters and BNY to provide for a process designed to maximize the value of their shares. The Court held that that process was entirely consistent with the rights conferred on Katotakis by the rights of first offer and rights of first refusal in the shareholders’ agreement. Waters and BNY could not sell their shares without first giving Katotakis the right to match the terms of any proposed sale. They met that obligation.
The Court of Appeal for Ontario has held that "superior proposal" conditions that permit shareholders to sell their shares to another buyer at a better price, provided that the rights holder is given notice of the superior proposal and the opportunity to match or better it, are not contrary to a right of first refusal.
This decision should provide comfort to our clients who are parties to shareholders’ agreements containing rights of first refusal and are thinking of selling their interest - as long as the rights of first refusal provision allows for additional selling terms "not contrary to" the rights (or better yet, explicitly allows for superior proposal conditions).
It should also provide comfort to our clients who are minority shareholders. A practical effect of the Court’s interpretation of the private agreement between Katotakis, Waters and BNY was that the minority shareholders of Financial Models were paid a much higher per share price.
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