A shareholders' agreement is an agreement which dictates the nature of the relationship between two or more shareholders of a limited company.
They are agreed between the shareholders, and usually the company as well, and may cover issues such as restrictions on the sales of shares, restrictions on issuing new shares, or the rights of shareholders to nominate a director of the company. They are important as they set out in clear terms shareholders’ ownership and voting rights in relation to decision-making. These agreements complement the articles of association, but will also often go into more detail about specific relationships between shareholders.
This guide will run through what happens when such an agreement is breached, and what the ramifications of such a breach will be.
A breach of shareholders' agreement can come about as a result of a number of circumstances, but basically occurs when an action is taken which violates the terms of the agreement.
This could be if a shareholder decides to sell some of a company’s major assets without the correct authorisation or if shares are transferred in a manner that contravenes the rules set out in the shareholders' agreement. A breach could also arise if a decision is made by the company without the required majority of shareholders.
Other areas which commonly lead to a breach are around the company’s dividend policy, or a breach of confidentiality obligations contained in the agreement.
While these actions in themselves will sometimes still be found to be valid, if other shareholders can show the action has caused them a loss then they can claim for a breach of contract against the instigator of the offending action. One of the most common ways of demonstrating an action has caused loss to a shareholder is through arguing that it has caused a devaluing in the shareholders’ shares. In this case, several steps can be taken, if the action is in breach of the agreement, including the suspension of the violating shareholders’ voting rights or the recovery of monetary damages to the injured party or parties. In extreme cases, this can even lead to a court-ordered injunction requiring the offending shareholder to take an action such as transferring their shares.
Under UK law, damages are a common law remedy to instances of breach of contract. When being assessed there are three different elements which are considered: loss of profit, reliance interest and restitutionary interest.
It is worth bearing in mind that these measures are designed to compensate a victim for the actual loss caused by the wrongdoer’s actions, rather than as an instrument to punish the offending party. Additionally, if the loss incurred by the plaintiff is too remote, that is to say not clearly caused by the actions of the defending shareholder, then damages may not be awarded.
Having said that, even if no loss has been caused by an action, but that action is still in violation of the terms of the shareholders' agreement, then nominal damages may still be awarded. These damages, known as ‘extra-compensatory damages’, are often awarded to vindicate the plaintiff or plaintiffs and mark their rights in the dispute, which can prevent future breaches from taking place.
Other than awarding damages, the most common remedy for resolving a breach of contract is via an injunction served by a court. However, this can be a slow process and may incur additional fees. These injunctions can mandate that shareholders take the required voting action to carry out the terms stipulated by the court, or can even force a shareholder guilty of wrongdoing to transfer their shares.
If a breach of a shareholders' agreement has occurred, it is vital to act swiftly to resolve the situation. Disagreements left to fester can cause problems at boardroom level and can sour relations between shareholders and thereby damage the business.
If you are seeking to resolve a breach of shareholders' agreement dispute via dispute resolution or other means then please contact our shareholder dispute solicitors on 0161 941 4000 or alternatively via email at firstname.lastname@example.org.