The North Carolina Business Court’s decision in Chalk v. Chalk highlights how buy-sell agreement provisions can fail when their mechanics do not align with real-world business decisions.
When business owners enter into a buy-sell agreement, the agreement often works on paper but breaks down in execution when relationships change, deadlines are missed, or one side controls key decisions. It is not enough to focus on the desired result, i.e., who gets to buy, who must sell, and what the purchase price is. A buy-sell agreement must also delve into the “how” when things may not go as expected, such as how the parties still navigate to that desired result when relationships break down, when deadlines are disputed, when conditions are not met, or when one side controls the events that may trigger the other side’s rights or obligations. The dispute in the Chalk case ultimately turned less on who was entitled to the shares and more on whether the parties followed the process required to get there.
A buy-sell or shareholder agreement is typically adopted by owners of a closely held business to govern what happens when an ownership interest needs to change hands. Whether triggered by retirement, termination of employment, death, or a breakdown in relationships, these agreements are intended to create a clear, orderly process for ownership transitions by addressing who has the right to buy, who must sell, and on what terms. In practice, these agreements are meant to reduce uncertainty, preserve control within the existing ownership group, and avoid disputes among shareholders. But as Chalk v. Chalk demonstrates, even well-intentioned agreements can create risk if the mechanics do not work in real-world scenarios. This decision provides useful guidance for business owners, boards, and attorneys involved in drafting or negotiating buy-sell and shareholder agreements for closely held companies.
The North Carolina Business Court’s recent April decision in Chalk v. Chalk, 2026 NCBC 31, illustrates how these agreements can fall short when their mechanics do not align with real-world circumstances. The case involved Chalk & Gibbs, Inc., a closely held insurance and real estate business founded by the Chalk and Gibbs families in 1925. By 2008, four individual shareholders each owned 25% of the company. One shareholder, William B. “Buff” Chalk, Jr., also worked as an employee for the business for nearly forty years. After Buff’s employment ended in 2023, the remaining three shareholders attempted to purchase his shares under the company’s shareholders’ agreement in accordance with its buy-sell provisions. Buff challenged the attempted purchase and claimed that the other shareholders breached the terms of the shareholders’ agreement and their fiduciary duties owed to Buff.
The Court’s opinion offers practical drafting lessons for owners of closely-held and family-owned businesses.
Buy-Sell Mechanics Must Work in Practice
The Contractual Structure
The shareholders’ agreement in Chalk created a sequence of rights that had to occur before the remaining shareholders could purchase Buff’s shares. In contract terms, this type of required step is often a “condition precedent”, meaning an event or requirement that must occur before certain contractual rights arise.
Under the shareholders’ agreement in Chalk, when a shareholder ceased to be employed by the company, that shareholder’s stock could first be purchased by their children. If a child was already employed by the company in good standing, the shareholder could gift or transfer shares to that child. If a child was not employed when the shareholder’s employment ended, the child had two years to become employed in the company in order to purchase the shares. Only if the shares were neither gifted/transferred nor purchased by that shareholder’s children within the requisite period could those shares be reallocated to the remaining shareholders. The sequence stated in the contract was important because it operated as a condition precedent, as the remaining shareholders’ purchase rights did not arise until the children’s opportunity had run its course.
What Went Wrong in Practice
After Buff’s employment ended, the remaining shareholders adopted resolutions authorizing their purchase of his shares. They also resolved that it was not in the company’s best interest to offer employment to Buff’s children at that time, during the next two years, or at any time in the future. The remaining shareholders argued that this decision meant the two-year period was effectively irrelevant because none of Buff’s children would become employees and, therefore, none could acquire the shares.
The Court disagreed. It concluded that the remaining shareholder resolutions did not satisfy the two-year condition precedent. The resolutions reflected the company’s position at that time, but they did not eliminate (and could not circumvent) the contractual two-year period by creating their own obstacle to employment. The agreement gave Buff’s children two years to become employed before the remaining shareholders’ purchase rights arose. The remaining shareholders therefore could not treat that opportunity as exhausted simply by deciding in advance that the children would not be hired. Only the passage of the two-year period could trigger the remaining shareholders’ rights to purchase.
For business owners, the Court’s analysis shows why the actual procedures in a buy-sell agreement are just as important as the ultimate purchase right itself. The remaining shareholders may have believed that their decision not to employ Buff’s children made the two-year period unnecessary, but the Court enforced the sequence the parties had written into the agreement. The two-year period for the children’s opportunity to become employed operated as a condition precedent to the remaining shareholders’ purchase right. The remaining shareholders acted too soon when they attempted to complete the buyout before the period expired.
The drafting point is therefore not just what the agreement allows, but how the agreement requires the parties to get there: when a buy-sell right depends on a required step, waiting period, or other condition precedent, the agreement should explain how the process unfolds, how each required step may be satisfied or waived, and how a premature, late, or defective action affects the parties’ rights.
The Court’s analysis also underscores that timing provisions are not merely technical: they allocate control and risk between the parties and will be enforced as written, even when they appear inefficient or inconvenient in practice. In short, courts will enforce the agreed-upon process, even when the business outcome may seem obvious.
Trigger Events Should Align With the Contract Rights They Create
The Business Court’s opinion in Chalk also highlights the risk of tying ownership rights to events controlled by an opposing party.
The Risk of Controlling the Trigger
The ability to purchase shares under the shareholder agreement was dependent upon, or triggered by, employment status. Buff’s children had potential rights to acquire his shares, but those rights depended on whether they were employed by the company within a certain period of time. The effect of the contract, as written, was a forced buyout: if the children were not company employees eligible to acquire or purchase the shares, then the remaining shareholders could purchase them.
That structure, however, created a practical tension. The same parties who stood to benefit from the buyout also had influence over whether the triggering condition would ever occur, in this case the potential employment of Buff’s children. Even though the Court held that the remaining shareholders acted too soon and abided by the two-year period requirement under the agreement, the remaining shareholders nonetheless retained influence during that two-year period over the employment decisions, which, in turn, would affect whether Buff’s children could qualify to purchase Buff’s shares.
The case also highlights the limits of attempting to pre-engineer contractual outcomes through corporate action. The remaining shareholders attempted to predetermine the result by resolving that the children would not be hired, but the Court refused to allow that approach to override the contractual process.
Yet, the Court did not impose a separate duty to fix that problem, and it did not rewrite the agreement.
Thus, if a contract right depends on a triggering event, the agreement should account for who controls that trigger. When the same party benefits from the outcome and controls the trigger, the agreement should include safeguards. For example, the agreement may define whether employment decisions can be made in the company’s sole discretion, must be commercially reasonable, or must be made in good faith, or may require written notice, a formal application, stated reasons for denial, or approval by disinterested decision-makers.
The key is to avoid a structure where one side controls the trigger that determines whether the other side’s rights exist, without explaining how that control must be exercised. In short, if one party controls both the trigger and the outcome, the agreement, not the court, must supply the guardrails.
If You Don’t Define “Material,” the Court Will
Why the Distinction Matters
The Court’s treatment of breach is one of the most useful parts of Chalk for drafting purposes. The Court held that the remaining shareholders breached the shareholders’ agreement by attempting to purchase Buff’s shares before the two-year period expired. The Court also held, however, that the breach was not material. As a result, Buff was not excused from his own obligations and performance under the agreement. The parties remained bound by the shareholders’ agreement even though the premature buyout attempt was a breach.
That distinction between a breach and a material breach matters. A party may assume that a breach of a buy-sell agreement allows it to walk away completely from the contract, refuse to honor its end of the deal, or treat the other side’s rights as forfeited. Chalk shows that assumption is wrong. A technical breach will not necessarily give a party leverage or an exit from the agreement. A breach may support a claim for breach of contract, but if that breach is not considered “material” (i.e., the breach substantially defeats the whole purpose or the very heart of the agreement), then it may not carry the type of consequences or excuses the non-breaching party might expect.
Business owners can reduce that uncertainty by defining the consequences of specific breaches in the agreement itself. The agreement can state that certain provisions are material, including timing requirements, notice requirements, valuation procedures, payment obligations, transfer-document obligations, and restrictions on premature purchase attempts. The agreement should also specify what remedies follow from particular breaches, including whether performance is excused, delayed, or still required. For example, the agreement may provide that failure to meet a specified deadline results in waiver, forfeiture, or other defined consequences, rather than leaving those outcomes to later interpretation.
The agreement should also address waiver and forfeiture clearly. If the parties intend that failure to act within a deadline forfeits a right or if the parties intend that a right can only be waived in writing, the agreement should say so. Courts generally do not assume forfeiture or material breach from silence. If the agreement does not define the consequence of a breach, the court will, and the result may not match the parties’ expectations.
Fiduciary Duties Are Not a Backstop for an Imperfect Contract
In Chalk, Buff also asserted a breach of fiduciary duty claim against the remaining shareholders. He argued that the other three shareholders collectively acted as a controlling majority and owed him fiduciary duties as a minority shareholder.
The Court rejected that claim. It explained that shareholders generally do not owe fiduciary duties to one another merely because they vote together. Although North Carolina law may recognize fiduciary duties in rare circumstances where minority shareholders act together as a controlling group, the Court found that those circumstances were not present in Chalk. The Court concluded that the remaining shareholders’ collective voting did not create fiduciary duties that overrode the parties’ agreement.
This is an important point for closely held businesses. Owners might assume that fiduciary duties, family relationships, or general fairness principles will fill gaps in a contract. However, Chalk confirms that those assumptions have limits: courts will enforce the agreement the parties actually drafted, not the one they wish they had negotiated. If the agreement does not provide a protection, a Court will likely not supply one under traditional principles of fiduciary duties.
If minority owners want protections against the collective action of other shareholders, those protections should be written into the agreement. For example, the agreement can require supermajority approval for certain actions, limit interested shareholders from voting on specific matters, provide inspection and information rights, require advance notice of proposed buyouts, or establish independent valuation mechanisms.
What Business Owners Should Take Away
In summary, Chalk is a reminder that buy-sell agreements should be drafted for conflict, not just cooperation. A useful agreement does more than identify who buys, who sells, and what the purchase price is. It also explains what happens if or when the process does not unfold as expected.
Business owners should review whether their agreements answer four practical questions:
- Do the conditions precedent actually work?
- Does the party who benefits from a trigger also control the trigger?
- What is the consequence of breach?
- Does the contract provide the protections the parties expect, or are they relying on fiduciary duties to fill gaps?
Business owners should not assume that a court will repair an agreement that does not function as intended. The better approach is to draft the agreement so that it provides a clear and enforceable path forward, one that reduces uncertainty, limits disputes, and avoids the need for a court to resolve what the parties could have addressed upfront. Well-drafted agreements do not eliminate disputes, but they significantly reduce the risk that those disputes will turn into litigation.
LEGAL DISCLAIMER
The information herein is not legal advice. The information is in the form of legal education and is intended to provide general information about the matter discussed. The above is not, nor is it intended to be, legal advice and does not create an attorney/client relationship. Consult your attorney with questions.
