Danish Supreme Court: Reclaim of Overpaid Amount in connection with the Repurchase of a Manager's Shares

An employer was entitled to reclaim an overpaid amount in connection with the repurchase of a manager's shares due to the fact that the manager had committed a material breach of contract. This was established by the Danish Supreme Court in its judgment of 28 April 2014.

In connection with his employment, a manager had, through his own company, made investments in the employer's holding company. After the manager had been dismissed and released from his duties ("Good Leaver"), the holding company and the manager entered into an agreement on repurchase of shares at a price fixed in accordance with the applicable shareholders' agreement. A month after the conclusion of the agreement, the manager was summarily dismissed. According to the shareholders' agreement, the repurchase value for the manager's shares should in case of a summary dismissal ("Bad Leaver") be fixed at the intrinsic value of the company, for which reason the employer considered that the holding company was entitled to demand repayment of the difference between that value and the sales price.

The question whether the summary dismissal was justified had previously been examined by an arbitration court, and therefore the Danish Maritime and Commercial Court had based its decision on the fact that the summary dismissal was justified. Subsequently, the Court concluded that pursuant to the shareholders' agreement, the manager had to be regarded as a "Bad Leaver" and that consequently the repurchase price had to be fixed at the intrinsic value of the company.
Then the Court pointed out that it was neither unreasonable nor in contravention of the code of honest conduct to impose the provision in the shareholders' agreement regarding the adjustment of the purchase price on the manager and his company. In this respect, the Court observed that the arbitration award was based on the fact that the manager had used his position to procure favourable cooperation terms for close friends; that the manager had accepted an amount equivalent to DKK 2 million from these friends; that the employer had suffered a capital loss corresponding to this amount; and that the manager had generally tried to conceal these circumstances from the employer.

Subsequently, the Court remarked that the repurchase agreement was based on the determining and perceptible precondition that no material breach had been committed by the manager. As the manager had been fully aware of the circumstances which later caused his summary dismissal and as the manager had concealed these circumstances from his employer at the time of entering into the repurchase agreement, the manager had to bear the risk of the failure to observe this determining and perceptible precondition.

Furthermore, the Maritime and Commercial Court found that the manager was liable for damages due to the fact that he had entered into the repurchase agreement knowing and concealing the circumstances that entitled the employer to a summary dismissal, for which reason the claim for repayment could be addressed both to the manager personally and to his holding company.

Consequently, the Maritime and Commercial Court ruled that the employer had a repayment claim for the difference between the sales value of the shares in a Good Leaver situation and the value in a Bad Leaver situation, equivalent to DKK 8,884,000.

The judgment of the Maritime and Commercial Court was upheld by the Danish Supreme Court on 28 April 2014.

The judgment shows that provisions stipulated in a shareholders' agreement regarding employee shares are valid in the event of a manager's abuse of his position etc. Neither will a manager be able to claim that the repurchase agreement is/was finally concluded if the manager was or ought to have been aware of the circumstances that formed the basis of the breach of contract and consequently the summary dismissal. Finally, the judgment shows that in the specific case the provisions in such agreement may be binding for both the manager and the manager's holding company if the manager had made his investments through such company.

Peter Schradieck, Attorney-at-Law and Partner, represented the employer at the Supreme Court as well as at the Maritime and Commercial Court, and Tina Reissmann, Attorney-at-Law and Partner, gave advice in respect of the employment law issues of the case.

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