How Not To Exercise A Purchase Option

The following case illustrated that it often helps to talk to a solicitor about the terms of a contract before acting on what you thought was right.

A purchase of shares in a retailer company fell through because the buyers failed to follow the prescribed procedure after exercising their option to purchase. In this case a successful motor vehicles and farm machinery retailer company had issued shares of 100. Thirty five shares were owned by the McMillans, 35 by a company controlled by the managing director of the retailer and 30 by a company controlled by the retailer’s founder.

The McMillans and the MD’s company had a 10-year option to purchase the founder’s company 30 shares.  They had to give three months’ notice of their intention to exercise the option, arrange for a valuation of the 30 shares within a specified time and then pay the price fixed by the valuation. Also, the option was conditional on the simultaneous exercise of an option to purchase units in a related unit trust. The trustee of the unit trust was the owner of the premises at which the retailer conducted its business. The option to purchase the units mirrored the option to purchase the 30 shares. Among other things, three months’ notice of the intention to exercise the option was required. The notice with respect to the units had to be in writing.

The McMillans and MD’s company gave notice of their intention to exercise the option to purchase the retailers shares. They arranged for a valuation of the shares, but were out-of-time. Furthermore, they did not give notice of their intention to exercise the option to purchase the units.
The founder company refused to sell its 30 shares.

The court held that the option requirements were clear.  All the requirements needed to be met before it could be validly exercised. The applicants had not satisfied the conditions of the option. Therefore, their proceedings were dismissed.

The applicants failed to view the agreement containing the option in the way that I tell my client to view all their written agreements, namely as user manuals.  Moreover, although the option was not validly exercised, it still had about two years left to run. Possibly, the applicants could have exercised the option again and, if successful, will have acquired the 30 shares that way.