What To Do If There’s a Breach of a Shareholders’ Agreement?

If there’s a breach of a shareholders’ agreement, it’s important to act in accordance with the terms of the agreement. In essence, shareholder’s agreements are created for this purpose – what to do when things go wrong.

It should outline the roles, responsibilities and relationships of shareholders in a business. It usually sets out how the company will be managed, dispute resolution mechanisms, restrictions on share transfers, and other important bits that govern the conduct of shareholders and protect their respective interests.

To get more information on Shareholder’s agreements check out this full breakdown.

So, what do you do when a shareholder’s agreement is breached? Let’s find out.

Review the Agreement

First of all, have a good old review of the existing shareholders’ agreement and make sure you fully understand what conditions have been breached.

Document the Breach

As they say, it’s all in the details. Make sure to document all the details of the breach and gather evidence. This includes everything from email and message correspondence, meeting minutes, recorded video calls or any other specific information.

Speak to a legal professional

Easy for us to say, but there comes a time when its best to speak to a legal professional with experience in corporate law. They’ll be able to provide you with guidance on how to deal with the breach, help you understand the possible legal implications, and also suggest the best course of action on how to deal with it.

Communication is key

Open communication with the breaching party is important. It might be tempting to bury your head in the sand, but this is rarely the best approach.

Notifying the individual (or entity) and expressing your concerns professionally and clearly is the first step. Be sure to outline the specific clauses of the agreement that they’ve breached.

This not only serves as a reminder of the agreed-upon terms, but also provides a basis for discussion on how to remedy the breach.

Keep a paper trail of all discussions to make sure there is a clear record of all back and forth. This can be extremely helpful in legal cases and will put you in good stead if things escalate.

Where possible, offer suggestions on how to rectify the breach. It may not need to be turned into a legal issue if it can be negotiated.

Negotiation or Mediation

The next step before things are escalated to a possible legal action is negotiation between the parties involved. Sounds simple because it is. An open and honest exchange between everyone involved may be all it takes to resolve the matter. Whether it’s over email, a call, or in person, it’s important to find common ground and look for a mutual way to rectify things. There might be trade-offs, whether it’s adjusting timelines or changing certain terms. But it’s important to remember you are trying to reach a status quo that every party is happy with. A compromise might be necessary, so it’s worth considering what the alternative of taking it further will entail and whether it’s worth it.

If negotiation fails, it might be beneficial to undertake mediation. Mediation essentially uses a third-party to help reach a mutually agreeable solution. They don’t make the ultimate decision, but they facilitate the communication and negotiation process.

Mediation offers a confidential, open forum where each party can express their thoughts and concerns to hopefully reach an agreement. The mediators’ job is to remain neutral and create an environment where an agreement can be made.

Enforce the Agreement

If all else fails, you might need to take legal action to enforce the terms of the agreement. This could involve pursuing a lawsuit or arbitration, as specified in the agreement. If it gets to this stage, if you haven’t already, then it’s time to seek some legal advice.

Carefully review the terms of the shareholder’s agreement to ensure compliance with any dispute resolution measures specified. Some agreements may require arbitration, while others may state litigation is required in a specific jurisdiction. Adhering to these contractual requirements is essential for a valid legal claim.

Remedies and Damages

The remedies and damages section of a shareholder’s agreement is designed to provide a clear framework for addressing breaches and ensuring that the parties have a clear course of action in the event of a breach.

It’s incredibly important to understand these provisions to address any breaches and to seek appropriate compensation or relief.

At this stage, legal advice should be sought to navigate the complexities of enforcing remedies and damages so that they align with the shareholder’s agreement and applicable laws.

Company Resolution

If the breach has made ripples that affect the wider company, it could be wise to involve other shareholders or board members in the resolution process.

Often involving the wider team will allow you to benefit from their experience and expertise. There might be legal or financial experts on the board who can offer their wisdom. Either way, often reaching out to other shareholders can provide extra support and help put together a solid plan of how to deal with the breach.

Termination of Agreement

In extreme cases, the shareholder’s agreement may allow for the termination of the agreement. This is a serious step that should be approached carefully and only taken in cases of severe breaches of a shareholder’s agreement where they can’t be remedied. Examples of a severe breach might include fraudulent activity such as embezzlement or falsifying financial reports. Essentially if the action threatens the business’ well-being and is difficult to recover from, there may be grounds to terminate the agreement. In an instance such as this, it’s vital to speak to an expert in corporate law.

Prevention for the Future

All being well, the dispute will be resolved, and things will revert back to normal, but sometimes this may not be the case. It’s important to learn, move on and prevent it from happening again in the future.

You should do a thorough review of the shareholder’s agreement to update anything that could help avoid the breach from happening again. There may need to be communication with existing shareholders to remind them of their rights and responsibilities. Refresher training to educate shareholders on matters of compliance, corporate governance, and legal obligations might be helpful.

Although the outcome may not always be positive, a breach of a shareholder’s agreement doesn’t have to be all negative. It may offer a chance to reassess current procedures and put measures in place to improve the process for dealing with issues in the future.

In our Guide to Shares and Shareholders, we dive into some of the issues mentioned in this article in more detail.