How to Sue for a Breach of Shareholder Agreement

A Shareholder Agreement governs the relationship between shareholders of a corporation. It contains provisions regarding the operations and management of the company, such as the issuance of shares, asset disposition, and appointment and removal of directors.

The Shareholder Agreement also states how the board of directors and the senior management will make critical corporate decisions. For instance, the Shareholder Agreement can mention that some decisions require a unanimous vote while others may require a majority or supermajority vote.

If any shareholder contravenes the terms of the Shareholder Agreement, the other shareholders may sue for breach of contract.

 

What Constitutes a Breach of the Shareholder Agreement?

A breach of Shareholder Agreement occurs when a party to the agreement violates its terms. The violation of a Shareholder Agreement can occur in many ways, including but not limited to the following:

  • The company decides on a matter without the requisite majority vote;
  • The shares are transferred or sold in contravention of the Shareholder Agreement;
  • A shareholder breaches the confidentiality terms of the Shareholder Agreement; and
  • A shareholder breaches the restrictive covenants.

 

When someone breaches the Shareholder Agreement, the aggrieved party can bring a claim for breach of contract. Depending on the facts and circumstances of the case, the injured party can seek different remedies from the Court.

 

What are Your Remedies for Breach of a Shareholder Agreement?

Shareholder’s remedies for the breach of Shareholder Agreement are:

  • Monetary and non-monetary damages;
  • Specific performance of the contract; and
  • Injunctive Relief.

 

Monetary and Non-Monetary Damages

The aggrieved party can ask for monetary damages for quantifiable losses caused by the breach of the Shareholder Agreement. A monetary damages award is intended to put the aggrieved party in the same position they would have been if the breach had not occurred. The non-monetary damages include damages for pain and suffering, bad faith conduct and mental distress.

 

Specific Performance of Contract

The injured party can ask for specific performance of the contract when no other remedy will adequately compensate them.

Since a specific performance remedy requires the other side to perform an unperformed contractual promise, the remedy is available only in certain cases.

For instance, if a shareholder breaches the Right of First Refusal (RFR), the aggrieved party can request the Court for specific performance of the RFR. In such cases, the Court orders the delinquent shareholder to offer its shares to other shareholders before offering them to a third party.

 

Injunctive Relief

In some cases, the aggrieved shareholder can seek an injunction from the Court to restrain the defaulting shareholder from continuing the wrongful act. The Court can grant injunctions either as interim relief or as a final remedy. For instance, the Court may grant an injunction where the defending shareholder violates a restrictive covenant such as non-compete or non-solicit covenants.

Injunctions can be mandatory or prohibitive. A mandatory injunction requires the other side to take some action. In contrast, a prohibitive injunction prevents the other side from doing something.

The Court may grant an injunction where the injured party demonstrates:

  1. There is a serious question to be tried;
  2. The party bringing the motion will suffer irreparable harm if the relief is not granted; and
  3. The balance of convenience favors granting of an injunction.

When a party to the shareholder agreement violates its terms, the aggrieved persons can file a lawsuit against them.

How to Sue for Breach of Shareholder Agreement

When a shareholder breaches a Shareholder Agreement, the aggrieved party may sue for breach of contract. The five basic steps involved in a commercial lawsuit are:

  • Exchange of pleadings;
  • Examinations for discovery;
  • Mandatory mediation (for Toronto, Ottawa, and Windsor);
  • Pre-trial conference; and
  • Trial

The claim for breach of the contract commences when the aggrieved party files, issues, and serves a Statement of Claim. The Statement of Claim must contain sufficient facts to support the claim for breach of contract, and it should be filed in accordance with the Ontario Rules of Civil Procedure (Rules).

The opposing party responds to the plaintiff’s Statement of Claim by serving and filing their Statement of Defence. The person bringing the suit can also serve and file a Reply to address any new facts raised in the Statement of Defence.

The next stage in litigation is the discovery process. In examinations for discovery, parties exchange documentary evidence and extract relevant admissions by questioning each other.

In Toronto, Ottawa or the Windsor-Essex court regions, the parties set down the matter for mediation within 180 days from the first filing of defence. During mediation, the parties appear before a neutral third party called a mediator who facilitates compromise through discussion of legal issues.

After discoveries and mediation, either party can set the matter down for trial by serving and filing a Trial Record. A pre-trial conference is scheduled after a party files the Trial Record. At the pre-trial conference, a judge acts as a neutral facilitator and tries to get the parties to settle the dispute.

The Court schedules a trial date if the parties fail to settle the dispute at the pre-trial conference. At the trial or hearing, the judge or jury considers the case presented by both parties, their evidence and gives its decision.

The decision of the judge or jury may be subject to appeal, but it becomes final once all appeals are exhausted.

 

How a Lawyer Can Help

Some companies have a legal department headed by a chief legal officer (CLO), also known as a general counsel. The CLO supervises and instructs the company’s in-house legal team and reports to its chief executive officer.

When someone breaches the shareholder agreement, the CLO can’t always help. The CLO’s job description includes advising the company on legal and regulatory compliance, labour and employment law issues, litigation involving the company, human rights violations, and employee accommodation requests. They cannot help individual shareholders bring a claim for the breach of the shareholder agreement.

The solution is to hire a commercial litigation lawyer to take legal action against the defaulting party. A commercial litigation lawyer has unique expertise in pursuing commercial litigation. They can provide a wide range of legal services, including but not limited to the following:

  • Providing legal counsel after conducting an initial assessment of the case;
  • Reviewing the facts and circumstances of the client’s case and developing a legal strategy;
  • Sending the shareholder who breached the shareholder agreement a demand letter proposing a resolution;
  • Negotiating with the shareholder who committed the breach;
  • Guiding their client through the litigation process.

 

The commercial litigation process is complex and riddled with technicalities. A commercial litigation lawyer knows the ins and outs of commercial litigation. They help you successfully navigate the court process to achieve your litigation goals.

 

Conclusion

A shareholder agreement is an important document, and it supplements the articles of incorporation of a corporation. When breaching the terms of the shareholder agreement a shareholder can sue another shareholder or the corporation.

A commercial litigation lawyer can help you bring a claim for breach of the shareholder agreement. They can assist you with all the stages of the litigation process and advocate on your behalf in Court to help you get your desired result.

 

Contact Us

If you are a shareholder of a corporation and want to bring a claim for breach of the shareholder agreement, our team of experienced commercial lawyers at Achkar Law can help. Contact us by phone toll-free at +1 (800) 771-7882 or email us at [email protected], and we would be happy to assist.

 

Related Topics

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·         Resolving Corporate Disputes – Arbitration, Mediation, And Commercial Litigation.