When are Shareholder Agreements Enforceable?

By James Woods
Managing Partner

A shareholder agreement is a legally binding agreement between members of a company that complete, define, or amend those rules stipulated in the business’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.

For assistance, please give us a call at (212) 684-2500 or send an online message today.

Enforceability of Shareholder 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 Breaches of Shareholder 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 a New York Corporate Law Attorney

Shareholder 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.

Contact us online or call (212) 684-2500 today.

About the Author

James Woods, Managing Partner of Woods Lonergan, holds more than 25 years of experience in corporate, real estate, and business legal matters. His expertise in handling negotiations, litigation, jury trials, and all forms of alternative dispute resolution spans multiple areas, including corporate, real estate, and commercial litigation. James actively represents dozens of Cooperative and Condominium Boards and serves as counsel to many Corporate Boards. Prior to founding the firm, James proudly served as an Assistant District Attorney for Nassau County and handled both jury and bench trials. With experience that also covers sophisticated transactions and complex acquisitions, James also serves as counsel to several domestic companies in a range of industries and commercial arenas, including real estate, insurance, banking, transportation, and construction. If you have any questions about this article you can contact attorney James Woods through his biography page.

Disclaimer: The information in this article and blog post (“post”) is provided for informational purposes only, and may not reflect the current law(s) in every jurisdiction. No information contained in this post should be construed as legal advice from Woods Lonergan PLLC or the individual author(s), nor is it intended to be a substitute for legal counsel on any subject matter. Nothing herein shall be construed to create an attorney-client relationship with Woods Lonergan PLLC. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the recipient’s jurisdiction. This post is attorney advertising.
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