Meaning
The legal cancellation of a share purchase transaction restores both the buyer and the issuing company to their original pre-contractual positions. A share rescission occurs when a court or contracting parties agree to undo the share purchase due to fraud, misrepresentation or a material breach of contract. The buyer returns the shares to the company, and the company returns the purchase price to the buyer.
This remedy is used when damages are insufficient to resolve the dispute.
Equitable Remedy
Unlike damages, which compensate for losses, this remedy seeks to erase the transaction entirely. When a share rescission is granted, the shareholder’s name is removed from the company’s registry of members as if the purchase never took place. This cancellation protects the buyer from any liabilities associated with being a shareholder of the company.
Operational Impact
Undoing a share transaction can create complex financial and corporate governance challenges for the company. A share rescission forces the company to return the invested capital, which can strain its liquidity and disrupt ongoing operations. If the shares represented a significant portion of the company’s equity, their return and cancellation can alter the balance of voting power among the remaining shareholders.
This shift can lead to deadlocks or changes in board composition, which delays strategic decisions. Additionally, the company must recalculate its financial ratios and adjust its capital structure on its balance sheet, which can affect its credit rating and loan covenants.
Statutory Limitation
The right to seek this remedy is subject to strict time limits and procedural conditions. If the shareholder delays filing the claim after discovering the misrepresentation, the court may deny the share rescission under the doctrine of laches. The right is also lost if the shares have been sold to an innocent third party.
