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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 clearly state 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 the ramifications of such a breach.
Breach of a shareholders' agreement
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 for the majority and minority shareholders. A breach could also arise if the company makes a decision 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.
Consequences if a shareholders' agreement is breached?
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 a breach of contract against the instigator of the offending action. One of the most common ways of demonstrating an action has caused a loss to a shareholder is by arguing that it has caused a devaluing in the shareholders' shares. In this case, several steps can be taken if the action breaches the agreement, including suspending the violating shareholders' voting rights or recovering 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.
Damages for breach of shareholders' agreements
Under UK law, damages are a common law remedy to instances of breach of contract. When being assessed, three different elements 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 an action has caused no loss, 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.
Remedies for breach of shareholders' agreements
Other than awarding damages, the most common remedy for resolving a breach of contract is through 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 the boardroom level, sour relations between shareholders, and thereby damage the business.
Here to help
If you are seeking to resolve a breach of shareholders' agreement dispute through dispute resolution or other means, you can contact our shareholder dispute solicitors below.