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Send Us An EmailWhat to Do When a Shareholder Breaches an Agreement?
In the world of business, agreements and contracts are essential to ensure that all parties involved are on the same page. A shareholder agreement contains the terms governing the relationship between the shareholders. These terms define the responsibilities and rights of shareholders and their obligations under corporate law.
However, there may be
instances when a shareholder breaches an agreement, which can cause significant
problems for a company. This breach can range from failing to meet financial
obligations to violating intellectual property rights or breaching
confidentiality agreements. When such a situation arises, it is crucial to know
what steps to take to protect the company's interests and resolve the issue
promptly and effectively.
In this article, we
will explore what actions a company can take when faced with a shareholder who
has breached an agreement.
What
to do if a Shareholder Breaches the Shareholder Agreement?
Depending on the
applicable statutes and terms of the shareholder agreement, the aggrieved
shareholder(s) can take the following actions:
- Alternative Dispute Resolution (ADR)
- File a suit for breach of contract.
Alternative Dispute Resolution
Most shareholder
agreements contain clauses requiring disputes among the shareholders to be
resolved through alternative dispute resolution methods such as arbitration,
mediation, or med-arb. The goal of ADR is to find a mutually acceptable
solution that satisfies both parties involved in the dispute.
Mediation involves
bringing in a neutral third party, a "mediator," who works with both
sides to facilitate communication and reach an agreement. The mediator cannot
make any binding decision concerning the dispute. However, the settlement
reached is binding on the parties.
Arbitration involves
bringing in a neutral third party, called an "arbitrator," who
listens to arguments from both sides and makes decisions on behalf of the
parties involved. The arbitrator's decision is called an "arbitral
award," which can be binding or non-binding depending on the terms of the
arbitration agreement.
Med/arb" is the
process that combines arbitration and mediation. The parties retain a neutral
person to help them reach a negotiated agreement in which they confer the right
to make a binding decision on the same person.
Negotiation involves
direct communication between the parties involved, with or without the
assistance of legal counsel. However, having legal representation during an ADR
process can be beneficial. A commercial litigation lawyer understands the
strength and weaknesses of their client's case and will be able to advise on
whether or not to settle the dispute or pursue litigation.
The aggrieved party
can sue the defaulting shareholder for a breach of contract if the agreement
does not contain an enforceable dispute resolution clause.
Claim for Breach of Contract
If a shareholder
breaches an agreement, claiming a breach of contract is another step that companies
can take. A claim for breach of contract involves notifying the other party
that they have failed to fulfill their contractual obligations and seeking
remedies as outlined in the agreement.
To claim for breach of
contract, the company must first establish that a legally binding agreement
exists and that the shareholder has breached it. This typically involves
reviewing the terms of the agreement and gathering evidence of any failure to
comply with those terms. Once this is established, the company should notify
the shareholder in writing (demand letter) of their failure to comply with the
agreement's terms.
The notification
should outline specific details related to the breach, including how it
occurred and what steps are required to rectify it. The company may also seek
remedies such as monetary damages or specific performance (forcing compliance
with contractual obligations).
One advantage of
claiming breach of contract is that it allows parties to address disputes
without resorting to litigation immediately. It allows negotiation and
resolution without involving formal legal procedures or court proceedings.
However, if
negotiations fail or there is no room for compromise, parties may need to
consider more formal legal action, such as filing a lawsuit. It's important to
note that while making a claim for breach of contract can be less expensive
than litigation, it still requires legal counsel experienced in contract law.
How
a Lawyer Can Help
Corporations may
appoint a Chief Legal Officer (CLO) or a General Counsel to provide legal
advice and guidance on their operations. While the roles are similar, there are
some differences between the two.
A CLO typically
oversees all legal matters related to the company and has a broad range of
responsibilities. They report directly to the CEO or Board of Directors and
manage a team of lawyers responsible for providing legal services to the
company. The CLO is involved in strategic planning, risk management,
compliance, corporate governance, and reputation management.
The general counsel
provides various legal services, such as drafting and reviewing shareholder
agreements and employment contracts, drafting workplace policies, handling
employee recruitment and terminations, and much more.
The CLO cannot advise
the individual shareholders regarding their rights and remedies since they are
involved in the internal functioning of the corporation. An aggrieved person
looking to sue a shareholder for breach of shareholder agreement should contact
a commercial litigation lawyer.
A commercial
litigation lawyer has the skills and knowledge to help you bring a claim for
breach of contract. The lawyer will review the facts and circumstances of your
case and advise you on the available legal remedies.
Contact
Us
If you are a
corporation shareholder and you want to bring a claim for breach of the
shareholder agreement, our team of experienced corporate lawyers at Stevens
and Company Law Corporation can help. We can provide the guidance and representation needed
to protect your business interests and achieve a favorable outcome. Contact us
by phone at 1-250-248-8220.
