It is a common scenario: a minority shareholder (often also an employee) of a closely-held corporation is being bought out by the corporation or one or more of its larger shareholders, usually incident to termination of employment or as part of a resolution of a dispute. The well-advised buyer/corporation wants "repose" – the secure knowledge that there will not be more claims brought by the departing shareholder – and seeks a comprehensive release of claims as part of the buyout.

A recent Maine Superior Court ruling has highlighted some key legal issues and considerations relevant to such releases. As most practitioners active in securities matters know, under both federal and most state securities laws, purported prospective releases of securities law claims are per se unenforceable, and the client should be so cautioned where stock is being purchased. Also, in most states, releases that are procured through fraud have limited, if any, validity. Careful counsel try to address the securities law and fraud concerns by confirming that the seller has been provided with recent financial statements of the company and has been informed of any other information about the company that would be material to a decision as to whether and on what terms to sell his or her stock. In addition, well-drafted releases contain language confirming that the seller has received all information he or she has requested concerning the company and has not relied on the company or any of its personnel in any respect relating to the transaction, except for the limited representations contained in the stock purchase agreement. Numerous cases have held that such "no reliance" language is a critical component of an effective release in such a transaction, including the recent Maine Superior Court grant of summary judgment in Barr and Warren v. Dyke, et al. (Docket No. BCD-CV-10-38, Order dated 9/14/11 (Horton, J.)).

The summary judgment decision in the Barr case is under appeal, with the appellants contending that the trial court erred in enforcing a release where the releasees, alleged to owe fiduciary duties to the appellants, failed to disclose certain allegedly material data concerning the company in obtaining the release. The principal issue is whether, as a matter of law, in such a setting releasors can ever effectively release claims against fiduciaries (directors or controlling shareholders) incident to a buyout of their stock, or whether, despite well-drafted "no reliance" language and despite the fact that releasors had brought litigation alleging other breaches of fiduciary duty by releasors (thus calling into question the reasonableness of any reliance by them on such fiduciaries), such releasors can be entitled to rely on breaches of alleged fiduciary duties of disclosure to overcome and invalidate such a release. The ultimate outcome of this case should be watched carefully, as it will likely offer much useful guidance to counsel and their clients in documenting and obtaining releases in analogous situations. In the meantime, care should be taken in planning for, documenting and ultimately executing the purchase documentation and releases involved in such a transaction. The ideal way of addressing this issue, insofar as stock buybacks are concerned, is to have in place, in advance, a binding buy/sell or similar agreement giving the company and/or some or all of the other shareholders the right (or obligation) to buy back such shares at a fixed or determinable price, thus eliminating the need for disclosure and an investment decision by the exiting shareholder at the time of the sale.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.