Q&As

Is a provision that requires a discount to the fair market value of a defaulting shareholder's shares to be transferred pursuant to an obligatory transfer mechanism enforceable? If so, what is the market standard percentage discount that is applied to fair market value in such circumstances?

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Produced in partnership with Julian Henwood of Gowling WLG
Published on LexisPSL on 26/04/2017

The following Corporate Q&A produced in partnership with Julian Henwood of Gowling WLG provides comprehensive and up to date legal information covering:

  • Is a provision that requires a discount to the fair market value of a defaulting shareholder's shares to be transferred pursuant to an obligatory transfer mechanism enforceable? If so, what is the market standard percentage discount that is applied to fair market value in such circumstances?

Is a provision that requires a discount to the fair market value of a defaulting shareholder's shares to be transferred pursuant to an obligatory transfer mechanism enforceable? If so, what is the market standard percentage discount that is applied to fair market value in such circumstances?

Unfortunately, this question has no straightforward answer. Notwithstanding the comprehensive review of the law relating to unenforceable penalties in Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis (Makdeshi), the various members of the Supreme Court were unable to agree on a single test to determine whether or not a contractual provision is a penalty. Practitioners are left to try to apply the various principles on which the majority were able to agree. For further information, see News Analysis: What implications does the Cavendish Square v El Makdessi Supreme Court decision have for corporate lawyers?

It is clear that a provision will no longer be a penalty merely because it entitles a party to payment of a sum (or transfer of property) that is not a genuine pre-estimate of that party's loss or damage. Neither will a provision be penal merely because it is included as a deterrent to breach of contract.

A penalty will arise where there is a secondary obligation that falls on a party only as a result of that party breaching one of

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