What to Do When a Shareholder Breaches an Agreement?

Posted:  Feb 28, 2023

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.



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