Where the shareholder agreement provided that a terminated shareholder’s obligation to sell back his shares post-employment was eliminated if the agreement were ever amended, the jury’s determination that certain acts amended the agreement necessarily eliminated this obligation. Loyd v. Griffin, et al, 2023 NCBC 92 (J. Robinson). Absent the sell-back obligation, the terminated-Plaintiff did not breach the agreement when he refused to sell his shares post-amendment and, absent a breach, the company had no claim for specific performance (i.e., requiring plaintiff to sell back his shares).

Plaintiff and Defendant were the sole shareholders in Defendant Griffin Insurance Agency, Inc. (“GIA”) at the time they signed GIA’s Shareholder Agreement in June 2018. (“Agreement”).  Per the Agreement, if terminated from GIA for any reason, the departing shareholder had to sell his shares back to GIA for a formula-based amount contained within the Agreement.  The Agreement also provided that if it were amended, “no purchase or sale shall be effective hereunder….” After June 2018, Plaintiff and Defendant admitted a new shareholder to GIA, but a new shareholder agreement was never signed. Plaintiff eventually had a falling out with Defendant and was terminated.  GIA then demanded Plaintiff sell his shares back, but Plaintiff refused.  Plaintiff sued Defendant and GIA.  GIA counterclaimed, seeking specific performance related to the sell-back provision. The case went to trial and, as part of its verdict, the jury found that the addition of the third shareholder constituted an “amendment” to the Agreement. Following the jury verdict, the Business Court addressed GIA’s demand for specific performance in its Final Order and Judgment (“Judgment”).

In its Judgment, the Business Court held that the Agreement’s plain language required a terminated shareholder sell his shares back to GIA only if the Agreement had never been amended or if “the amendment… expressly provided that the sale provisions remain valid and enforceable.” (Judgment, ¶8).  While the jury found that the addition of the third shareholder constituted an amendment to the Agreement, the Business Court found no evidence that the three shareholders had ever agreed the original sell-back provision would remain in effect.  As a result, Plaintiff had no obligation to sell his shares back to GIA in light of the amendment. Absent a contractual  duty to sell-back his shares, Plaintiff’s refusal to sell his shares could not constitute a breach of the Agreement. Without a breach of the Agreement, the Business Court held, GIA had no right to an order requiring Plaintiff to specifically perform the sell-back provision and so entered judgment in Plaintiff’s favor.

Based upon this decision, a company should look carefully at the terms of its contracts (especially shareholder agreements) to ensure that any contractual obligations have not been eliminated by later amendments.

Additional Legal Points: Where an ambiguity exists in a contract, North Carolina law recognizes that the ambiguity will be interpreted against the drafter.  (Judgment, ¶10).