When Are Shareholders' Agreements Enforceable?

Shareholders’ agreements are a legally binding agreement between members of a company that complete, define, or amend those rules stipulated in the company’s bylaws.

Shareholder agreements can be diverse in the matters they apply to and can address matters such as the shareholding structure of the company and corporate governance matters as well as the scope of business of the company.

If there are rights and obligations of shareholders and corporate matters that are not regulated by the company’s articles of association, then they can be regulated in a shareholder agreement.

When, however, are shareholder agreements enforceable? Our experienced New York City corporate lawyers explain what you need to know.

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Enforceability of Shareholders’ Agreements

As a legally binding contract, a shareholder agreement is enforceable if it aligns with the rules of contract enforceability.

That means that the things like the basic contract requirements of offer, acceptance, and consideration will apply in order for a shareholder agreement to be enforceable.

Remedies for Breach of Shareholders’ Agreements

If found in compliance with the rules of contract law, then the remedies available in the event of a breach of a shareholder agreement will, in many cases, proceed under the normal rules of contract law.

Should the terms of a shareholder agreement be breached and a party looks to enforce its terms, the consequences of the breach will depend on the facts of the individual case.

Remedies for the breach of an enforceable shareholder agreement may include the innocent party electing to terminate the contract. Alternatively, the innocent party may seek damages suffered as a result of the breach of the agreement.

Calculating what damages should be awarded in the event of a shareholder agreement’s breach can be very difficult. Losses resulting from such a breach are likely to be difficult to quantify. In general, damages are aimed at putting the innocent party in the position he or she would have had the breach not occurred and the contract had been acted upon as it should have been.

In some cases, a court may order specific performance of a contract as a whole or of a specific contract provision that was breached. Specific performance is a remedy that is equitable in nature. It is at the discretion of the court to be ordered in the event of a contract’s breach.

In other cases, if a shareholder agreement has been breached, a court may order an injunction as a remedy for the breach.

With an injunction, a negative stipulation in the contract may have been violated and the court would then order that the act violating the negative stipulation be stopped. Courts are generally hesitant to enforce contract provisions that place a restraint on trade through the use of an injunction.

Should an injunction be ordered, it is likely to be coupled with an award for damages. An injunction is sort of the opposite of a contract’s specific performance.

Instead of a party being ordered to carry out the terms of the contract, the party is ordered to stop an act found in violation of the contract.

Contact Our New York Corporate Law Attorney

Shareholders’ agreements can be incredibly useful, but need to be enforceable for full benefits to be realized. Talk to the team at Woods Lonergan PLLC about getting a shareholder agreement in place for your company.

About the Author

James F. Woods is Founder and Managing Partner of Woods Lonergan. He has tried more than 60 jury cases to verdict as first-chair trial counsel, beginning his career as a prosecutor, and resolves complex commercial and real estate disputes valued at $1M to $100M+ for business owners, principals, and middle-market enterprises across the New York metro area. He appears regularly in the New York Commercial Division and in the federal district courts for the Southern and Eastern Districts of New York, and has argued appeals in the Appellate Division and the Second Circuit.

His practice covers complex commercial litigation, real estate and asset litigation, partnership and shareholder disputes, fiduciary breach and corporate fraud, and cooperative and condominium governance. He counsels corporate and cooperative boards throughout New York.

The Legal 500 United States ranks James in its New York Elite rankings for Commercial Disputes, and his peers have recognized him with Martindale-Hubbell's AV Preeminent rating. Woods Lonergan is ranked in Chambers USA: Spotlight New York for Litigation: General Commercial and Real Estate. James serves on the Commercial & Business Litigation Committee and the Business Torts & Unfair Competition Committee of the American Bar Association Section of Litigation, and on the Cooperative & Condominium Law Committee of the New York City Bar Association. His commentary on New York commercial and real estate disputes has been quoted in The New York Times, The Washington Post, Bloomberg Law, Law360, and Forbes.