How to interpret an exit clause in an investment contract?

When parties to an agreement differ of opinion regarding the interpretation of a contract clause, it is often to a judge to decide on the matter. He must however take more into consideration than merely the literal meaning of the wording. Dutch contract lawyer Marco Guit discusses a recent case about interpretation of contracts terms.

Shareholders conclude investment agreement

The dispute is about an investment agreement. Parties to this agreement are the two original shareholders of a company and a third party who has just taken a share The portion of registered capital of a private or public limited company
» Meer over share share in the company. The three shareholders agree that they have the intention to sell the company in the foreseeable future. In the contract this future sale is referred to as “exit”. Among other things, the exit is relevant because the two original shareholders would compensate the company for a payment made in the past in case of an exit.

Sale by trustee qualifies as exit?

But even before the shareholders can cash in their investment, the company goes bankrupt. The trustee sells of some of the subsidiaries of the company and claims that he is entitled (as trustee) to the agreed compensation of the two original shareholders, seeing that this sale qualifies as an “exit”. The shareholders do not share this view and the trustee submits the dispute to a court.

Interpretation according to generally accepted standards

The court considers above all that it is up to the trustee as claimant to present sufficient grounds to back up his interpretation of the term exit. According to the court, the trustee has failed in doing so. The term “exit” as referred to in this particular investment transaction must be interpreted in a way in accordance to generally accepted standards. Clearly this term sees on the collective and deliberate decision of the shareholders to sell off their participation in the company. The shareholders need to be involved in this sale. According to the court the forced sale by a bankruptcy trustee does not qualify as an exit in the meaning of this contract.

AMS Lawyers for all business contracts

In this case the trustee had the disadvantage of not being a party in the agreement he based his claim on. When the actual parties have a dispute about the interpretation of a contract clause, a court will have to look to the intention of parties, as well as the literal wording of the clause. Prevent these lengthily and costly law suits by including clear definitions of specific terms in your contract. AMS Lawyers has broad experience in drafting and negotiating contracts and can give tailored advice. Please feel free to contact our office for more information.