Contract between founders set aside as unreasonable

Six founders jointly owned a company. In 2017, four of the founders sold a total of 45.5% of the shares to the two remaining owners for nearly NOK 41 million. The buyers were unable to finance the purchase price, and the sellers therefore extended credit secured by a pledge over the shares. To give the buyers time to realize the value of the company, several payment extensions were also granted. All six founders shared a common objective of ultimately selling the company, thereby obtaining compensation for the work they had invested in the business.

In connection with negotiations with a foreign company regarding a capital injection and the sale of shares in the company, the parties entered into a settlement agreement under which the agreed purchase price for the shares was reduced by 70%, to approximately NOK 12.2 million. Payment was to be made once the transaction with the foreign company had been completed.

A few months later, all shares in the company were sold to the foreign company for NOK 180 million, with the two remaining owners receiving cash consideration of NOK 94.5 million. The sale generated a substantial profit for them, and the proceeds would have been sufficient to cover the original purchase price agreed for the shares.

The four founders who had accepted the reduced price argued that they had been subjected to disloyal conduct and withholding of information. The two share purchasers, on the other hand, contended that the sellers had consciously chosen a lower-risk outcome in order to ensure that at least part of the originally agreed purchase price would be paid.

Like the Court of Appeal, the Supreme Court held that the settlement agreement was unreasonable and should be set aside in its entirety pursuant to Section 36 of the Norwegian Contracts Act. The sellers were therefore entitled to payment in accordance with the 2017 share purchase agreement, subject to deduction of the amounts already received under the settlement agreement.

The Supreme Court emphasized the circumstances under which the settlement agreement had been concluded and the fact that information had been withheld. The sellers and buyers were not on an equal footing in terms of knowledge and resources, and they were bound by a relationship of loyalty arising from their previous agreements.

The judgment provides guidance on the application of Section 36 of the Norwegian Contracts Act in commercial contractual relationships.

Source: Supreme Court