Shareholder Agreement: What Can You Do If a Shareholder Breaches?achkarlaw-admin
A shareholder agreement contains terms governing the relationship among the shareholders. These terms define the rights and responsibilities of shareholders in addition to their obligations under corporate law. While the provisions of corporate law cannot be changed within a shareholder agreement, shareholders are free to use the agreement to shape and decide certain aspects of their relationship.
The agreement contains rights, obligations and remedies better suited to a corporation’s needs than statutes such as the Ontario Business Corporations Act (“OBCA”) and Canada Business Corporations Act (“CBCA”). The shareholder agreement deals with matters such as issuing shares, asset disposition, and appointment and removal of directors. It can also specify how shareholders make certain corporate decisions.
Since a shareholder agreement is essentially a contract, the parties may breach it by failing to comply with its terms.
How can a Shareholder Breach the Shareholder Agreement?
Shareholder disputes can arise in different contexts, such as disagreement over the corporation’s direction, breach of the shareholder agreement, breach of fiduciary duty, differences in compensation or contribution, and minority shareholders’ rights. Many shareholder disputes arise when a shareholder violates the terms of the shareholder agreement. Examples include:
- Transfer or sale of shares in a manner that contravenes the shareholder agreement;
- Breach of the confidentiality terms;
- Breach of the restrictive covenants;
- Breach of fiduciary duty by the controlling shareholder; and
- Transfer of the corporation’s assets by the majority shareholder without proper authorization.
What can you do if a Shareholder Breaches the Shareholder Agreement?
Depending on the terms of the shareholder agreement and applicable statutes, the aggrieved shareholder can take the following actions:
- Alternative Dispute Resolution (ADR); and
- File a suit for breach of contract.
Alternative Dispute Resolution
Many shareholder agreements contain clauses requiring disputes among shareholders to be resolved through alternative dispute resolution methods such as mediation, arbitration, or med-arb. In mediation, a neutral third party, called a “mediator”, assists the parties in resolving their dispute through discussion. The mediator cannot make any binding decision regarding the dispute. However, the settlement reached through mediation is binding on the parties.
Arbitration is a procedure where the parties agree to appoint a neutral third party, called an “arbitrator”, to consider the evidence and arguments and render a decision. The arbitrator’s decision is called an “arbitral award”. Depending on the terms of the arbitration agreement, the arbitral award can be binding or non-binding. Mediation/arbitration, also known as “med/arb”, is the process that combines mediation and arbitration. The parties retain a neutral person to help them reach a negotiated agreement, failing which they confer on the same person the right to make a binding decision. While the aggrieved person may participate in the above processes without a lawyer, having legal representation during an ADR process can be beneficial.
A commercial litigation lawyer knows the strength and weaknesses of their client’s case and can advise on whether to settle the dispute or pursue litigation. If the shareholder agreement does not contain an enforceable dispute resolution clause, the aggrieved party can sue the delinquent shareholder for a breach of contract.
Claim for Breach of Contract
A shareholder agreement is a contract between the shareholders and/or shareholders and the corporation. Therefore, if a shareholder breaches its terms, the aggrieved party can file a civil suit for breach of contract. Before filing a civil suit, the aggrieved shareholder should send the delinquent shareholder a demand letter through a commercial litigation lawyer. In the demand letter, the lawyer summarizes the events, states their client’s legal position, and proposes an offer to settle the matter outside the Court.
The benefit of sending a demand letter is that the other side might be willing to settle the matter and pay the damages without the aggrieved shareholder having to go through the lengthy and expensive litigation process. An aggrieved party can file a civil suit if the delinquent shareholder fails to agree with the demands raised in the demand letter.
The aggrieved party can ask the Court for the following remedies for the breach of the agreement:
- Monetary and non-monetary damages;
- Specific performance of the contract;
- Orders to perform or avoid certain acts, called “injunctions”; and
- Sale or purchase of shares of the defaulting party.
How a Commercial Lawyer Can Help
Most corporations appoint a Chief Legal Officer (CLO) or a general counsel to head their in-house legal team. The chief legal officer reports to the company’s chief executive officer and advises the board of directors and senior management about their legal and regulatory obligations. The CLO oversees the work of the company’s legal department and provides legal counsel on various legal issues affecting the company.
The general counsel provides a full range of legal services, such as drafting and reviewing shareholder agreements and employment contracts, handling employee recruitment and terminations, drafting workplace policies, and much more. Since the CLO is involved in the internal functioning of the corporation, they cannot advise the individual shareholders regarding their rights and remedies. An aggrieved person looking to sue someone for breach of shareholder agreement should contact a commercial litigation lawyer.
A commercial litigation lawyer has the knowledge and skills to help you bring a claim for breach of contract. They will review the facts and circumstances of your case and advise you on the available legal remedies. The steps involved in a typical civil lawsuit are:
- the exchange of pleadings,
- examinations for discovery,
- mandatory mediation,
- pre-trial conference, and
A litigation lawyer can guide you at each stage of the litigation process to help you achieve your desired outcome.
A shareholder agreement supplements the articles of incorporation of a corporation. It specifies the rights and regulations of a corporation’s shareholders. If a shareholder breaches the shareholder agreement, the aggrieved person can sue for breach of contract. A commercial litigation lawyer is a trained professional who can use their knowledge of the law and legal process to bring a claim on your behalf. They can use their negotiation and advocacy skills to give you the best chance of success.
If you are a corporation shareholder and want to bring a claim for breach of the shareholder agreement, our team of experienced commercial litigators 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.