How To Draft an Enforceable Shareholder Settlement

Agreements that settle shareholder disputes or that provide for shareholder buy-outs are extremely vulnerable to later attack on grounds of fraud and breach of fiduciary duty. Drafting such settlements to achieve true finality is extremely challenging. Here is a drafting checklist and sample language to use in settlements involving shareholder buy-outs.

Settlement Checklist

Wording of the Release

Release language must be clear and unequivocal and must “mention” the claims to be released. It must also clearly state that it applies to claims of fraud in the inducement of the settlement agreement itself. Both fraud and fiduciary duties claims should be listed. The best practice is to include a broad general release, followed by a more specific (but non-exclusive) listing of specific claims.

The following is an example:

[Selling shareholder], on behalf of him/herself, his/her spouse, his/her affiliates, subsidiaries, partners, and any and all parties that may be able to make a claim by, through, or on behalf of him/her, fully and completely releases, acquits, and discharges all claims, causes of action, debts, obligations, and disputes that he/she may have against or as to [the acquiring or remaining shareholders], [the company], or the spouses, parents, subsidiaries, partners, affiliate, officers, directors, members, managers, attorneys, employees, or agents of [the acquiring or remaining shareholders and the company], whether known or unknown, whether accrued or unaccrued, from the beginning of the world to the date of this Agreement, save and except for the obligations of this Agreement. This release includes but is not limited [to all claims and counterclaims that were or could have been asserted in the Litigation and] to all claims of breach of fiduciary duties (including in connection with the negotiation and execution of this Agreement), all claims of fraud in the inducement of this or any other agreement, all claims of common law and statutory fraud, nondisclosure, misrepresentation, violations of the Texas Securities Act, shareholder oppression, negligence, mismanagement, breach of contract, [and any other matters that may apply]. This release includes but is not limited to any derivative claims that [selling shareholder] could have asserted on behalf of [the company].

Covenant Not to Sue and Desire for Finality

In addition to the release, it is prudent to include a covenant not to sue. This may also provide a basis for a claim of attorney’s fees in enforcing the settlement because the later attack on the settlement will be a breach of the agreement as well as a violation of the release.

Shareholder Settlement

The intent of both parties is that this Agreement shall be a full and final resolution of all claims and disputes between and among [the company] and the parties hereto. Therefore, each party covenants not to sue as to any matter, claim, or dispute that has been released or that relates to or arises from this Agreement, save and except for the enforcement of the specific obligations stated herein.

Representations and Warranties

A section of representations and warranties is useful.

Representation by an Attorney

Settlements are much more defensible if the selling shareholder is represented by counsel. The existence and role (or intentional waiver of counsel) should be clearly stated in the settlement agreement.

Consider the following:

[Selling shareholder] has been represented by able, experienced, and knowledgeable legal counsel in the negotiation and execution of this Agreement. [Selling shareholder’s] counsel has been actively involved in the drafting of the language of this Agreement and has fully advised [selling shareholder] of his rights and responsibilities under this Agreement and of the risks and benefits of entering into this Agreement.

If the selling shareholder has not employed counsel, then consider the following:

[Acquiring Shareholder and the Company] have advised and urged [selling shareholder] to retain counsel to assist in the negotiation and preparation of this Agreement. [Selling shareholder] has knowingly and intentionally waived his right to be assisted by counsel. [Selling shareholder] is knowledgeable and experienced as to business matters and as to the nature and subject of this Agreement, has been actively involved in the negotiation and drafting of the language of this Agreement, and is fully aware of his rights and responsibilities under this Agreement and of the risks and benefits of entering into this Agreement.

Drafting and Negotiation of the Agreement

Another extrinsic factor in the enforceability of is the negotiation of the agreement. Additionally, it is important to negate the presumption that language is interpreted against the drafting party.

Both parties have been actively engaged in negotiating and drafting the language of every aspect of this Agreement. Both parties agree that none of the provisions are boilerplate, and that each provision has been considered and negotiated. Both parties agree that the language should not be construed against either party.

Existence of Litigation

If the settlement has involved litigation, then it is important to recite those facts. For example:

This Agreement settles a dispute that has been the subject of active and contentious litigation over a period of 16 months, involving extensive discovery by both sides, in which thousands of pages of documents have been exchanged, six depositions have been taken, experts have been retained on both sides and have rendered opinions. Both parties agree that they have had a full opportunity to conduct such discovery and are fully informed as to the subject matter of this Agreement. Both parties agree that this Agreement was negotiated at arm’s length under adversarial conditions, and neither party is relying on the other in any way in entering into this Agreement

Knowledge and Investigation

Along with the disclaimer of reliance, it is advisable to include a statement that each party is basing his decision to enter into the agreement solely on his own knowledge and judgment:

Each party has conducted his own investigation before entering into this Agreement and is relying solely upon his own judgment in making this Agreement. To the extent that additional information might have been obtained, each party waives his right to such information and assumes the risk that additional information might be unknown.

Fairness and Arms Length

Fiduciary duty claims involve not only information but fairness—both to the company and to the selling shareholder. Therefore, it is useful to have a representation of fairness:

Both parties represent and warrant that this Agreement has been negotiated in good faith and upon full information and is entirely fair in all respects to [the company] and to each party.

Authority, Ownership and No Assignments

It is important to get a representation and warranty from the selling shareholder as to his ownership and authority in entering into the settlement:

[Selling shareholder] represents and warrants that he/she is the sole owner of the stock/ownership interests being conveyed in this Agreement and of all claims being released, that he/she has not assigned or conveyed any interests in the same, and that he/she has full and complete authority to convey the stock/ownership interest, release the claims, and enter into this Agreement.

Fairness and Arms Length

Merger Clause

The purpose of the merger clause is to preclude the assertion of any prior or side agreements:

This Agreement is the entire agreement of the parties and supersedes all prior agreements, promises, statements, and representations. There are no agreements, promises, statements, or representations between the parties that are not stated within the four corners of this Agreement.

Disclaimers and Waivers

The disclaimer of reliance is critical to avoiding a subsequent claim of fraud in the inducement. The disclaimer should be carefully drafted to include fraud by non-disclosure. The disclaimer should also include a waiver of fiduciary duties, although it is an open question whether such a waiver is enforceable.

[Selling shareholder] has not relied on any statement, representation, promise, or non-disclosure not stated expressly in this Agreement and hereby disclaims and waives any subsequent claim of reliance. [Selling shareholder] disclaims and waives any fiduciary duties that may apply to the negotiation and execution of this agreement and waives any presumption of invalidity that might otherwise apply to this Agreement.

Disclosure and Fairness

Regardless of the wording of the settlement agreement, the acquiring shareholder (or the owner benefiting from the company’s acquisition of shares) should approach the settlement with the knowledge that he may ultimately be compelled to demonstrate good faith, full disclosure, and fairness. Therefore, proof should be compiled in advance that would permit a defense of the substantive terms of the settlement. It may be wise to obtain a third-party appraisal of the shares. It may be wise to disclose that appraisal prior to the execution of the settlement agreement. It would be wise to insist that the selling shareholder actually be represented by counsel and to insist that the selling shareholder’s counsel play a meaningful role in the drafting of the agreement. Courts tend to be biased in favor of final settlement agreements, but care must be taken to eliminate as many of the extrinsic factor as possible that may render a shareholder settlement unenforceable.


The law makes it difficult to reach a final settlement involving the acquisition of ownership interests. Care in drafting and arranging the circumstances of the settlement may vitiate some of these risks. Drafters must remember that not only fraudulent misrepresentations need to be dealt with but also fraudulent non-disclosures and breaches of fiduciary duty. Efforts should be taken to deal with each of these theories explicitly in the release, representations and warranties, and disclaimers and waivers. Nevertheless, no drafting is absolutely certain to provide a defense against a subsequent attack on the settlement. Therefore, some care should be taken to make sure that the disclosure provided and the price paid are defensible and that the selling shareholder is represented by counsel who plays a meaningful role in the drafting. The more an acquiring shareholder does or even seems to take advantage, the more likely that the settlement will be set aside.

This post is taken from a recently published white paper: How to Fraud-Proof Shareholder Settlements. Download the entire white paper with complete legal analysis and case citation.

How to Fraud-Proof Shareholder Settlements

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