Legal Updates

When after a merger the absorbed company ceases to exist agreements as to its shares that did not refer to a merger will cease to apply

December 12, 2021

As part of the consideration in the sale of shares, it was agreed that if the purchaser realizes its holdings in the company in profit in accordance with the terms set forth in the agreement, the seller will be entitled to participate in the profit. Following the conclusion of the agreement, a merger transaction was made between the company and another company and the company was absorbed into the other company and ceased to exist. The purchaser of the shares later sold shares received in the merged company.

The Court held that the sale of shares in the merged company is not considered a sale for the purpose of the agreement and does not entitle to profits under the agreement. Generally, the wording of an agreement has a decisive status in its interpretation. Nevertheless, it must be checked whether the agreement was executed between private individuals, whom have a limited ability to use contractual language to their unfamiliarity with the law and thus the parties’ intent should be given priority; or whether it is a business agreement between sophisticated and represented parties, in which case, considerations of certainty justify granting priority to the wording. Here, it is a business agreement between sophisticated and represented parties and therefore the wording should be given a decisive status. The wording indicates that it was agreed between the parties that the profit participation mechanism will apply to any sale of the shares defined as shares of the original company only. Furthermore, the agreement does not include a definition of the word “sale”, in a manner that also includes a merger. Thus, the profit participation mechanism would apply to the merger transaction (for which no profit participation was requested), but not to the sale of shares of the absorbing company, which is a different entity.