Protecting shareholder’s rights in the event of a breach of the shareholder’s agreement

Shareholder’s agreement concept. Some typical consequences of a breach of the shareholder’s agreement should also be highlighted. Protection of shareholder’s interests
07.07.2021

If you are a founder of a company that has several shareholders and directors, a shareholder’s agreement (hereinafter – shareholder’s agreement, contract) will ensure that everyone agrees on how the company should be run. This contract can be made at any time during the lifetime of a company.

With all shareholders being parties to a shareholder’s agreement, the company is also a party to the agreement. In this case, the legal status of the shareholder’s agreement is similar to the company’s articles of association, namely a contract between the shareholders and the company.

Shareholder’s agreement concept

The shareholder’s agreement is the instrument by which the owners of shares agree on the disposal of their rights. Among these rights are:
• to vote at a general meeting of shareholders,
• to agree a voting option with other shareholders,
• to acquire or dispose of shares at a predetermined price or upon the occurrence of certain circumstances,
• to refrain from disposing of shares until certain circumstances occur,
• to take other concerted actions in connection with the management of the company, its operations, reorganization and liquidation.
As a rule, the main objectives of the contract are to organize the operation of the company, determine the specifics of profit distribution among shareholders and regulate issues related to divestment of shares, resolving deadlocks.

Some typical consequences of a breach of the shareholder’s agreement should also be highlighted:

- the innocent party in breach of the shareholder’s agreement may decide to terminate said agreement;
- damages (losses) may be payable to the injured party;
- a court may order the performance of the obligations arising from the shareholder’s agreement;
- the innocent party may request an injunction to prevent an alleged breach of the shareholder’s agreement.

Protection of shareholder’s interests

CPO Group LLC has considerable experience in concluding shareholder’s agreements. In addition, clients often raise the issue of breach of contracts by its parties.
The CPO Group team can advise you on ways to protect your interests in the event of breach of the shareholder’s agreement, depending on the particular terms of the shareholder’s agreement.

For example:
• invalidation of a resolution of a general meeting of shareholders;
• invalidation of a transaction made by a party of a shareholder’s agreement in breach of the terms of that agreement;
• termination of a legal relationship through compulsory buy-out of voting shares of the shareholder by a joint-stock company,
• alienation of shares,
• transfer of the rights and obligations of the purchaser of the shares to the holder of the pre-emptive right,
• compulsory redemption of shares by the company at the shareholder’s request.

One of the most common ways of proving that an action has caused a loss to a shareholder is to prove that it has resulted in the depreciation of shareholder's shares. In this case, if the actions lead to the breach of the agreement, several steps can be taken, including suspending the voting rights of the breaching shareholders or recovering monetary damages from the affected party or parties. At the very least, this may lead to an injunction compelling the offending shareholder, for example, to transfer their shares.
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