A shareholders’ agreement is often signed at the beginning of a business relationship when everyone is working towards the same objective.
Its real value, however, may only become apparent when the shareholders stop agreeing.
What happens if one shareholder ignores the agreement? Can another shareholder enforce it? What if a shareholder sells shares without following the agreed procedure, breaches a reserved matters provision or refuses to comply with an agreed exit mechanism?
A properly entered into shareholders’ agreement can generally be legally binding and enforceable in Ireland.
However, whether a particular provision can be enforced and what remedy is available will depend on the wording of the agreement, who the parties are, the nature of the alleged breach, the company’s constitution, the Companies Act 2014 and general principles of Irish contract law.
If a dispute has already arisen, the first step is usually to examine exactly what the shareholders agreed and what has subsequently happened.
A shareholders’ agreement is a contract regulating aspects of the relationship between some or all of the shareholders of a company.
The company itself may also be a party to the agreement.
A shareholders’ agreement can deal with matters such as:
The agreement essentially allows the shareholders to establish rules for situations that might otherwise become difficult to resolve after a dispute arises.
In principle, yes.
A shareholders’ agreement is a contractual arrangement and, where a valid and binding contract exists, the parties can generally be required to comply with their contractual obligations.
The Companies Act 2014 also expressly recognises agreements between members in the context of limitations on corporate authority, while separately providing rules concerning contracts entered into by companies.
However, saying that a shareholders’ agreement is “legally binding” does not mean that every clause in every agreement will automatically be enforced exactly as a shareholder wishes.
A court considering a dispute may need to examine:
The precise wording of the agreement is therefore extremely important.
One of the first questions in a shareholders’ agreement dispute is: who actually signed it?
A shareholders’ agreement is fundamentally contractual.
It will therefore generally bind the parties to the agreement rather than automatically binding every person who subsequently becomes involved with the company.
This becomes particularly important when new shareholders are introduced.
Suppose three founders sign a shareholders’ agreement. Several years later, a fourth shareholder acquires shares but never becomes a party to that agreement.
The founders should not simply assume that the new shareholder is contractually bound by all of its provisions.
For this reason, shareholders’ agreements commonly require a new shareholder to enter into a deed of adherence or otherwise agree formally to be bound by the existing shareholders’ agreement before acquiring shares.
Companies should ensure that these procedures are actually followed when new shareholders are introduced.
Not necessarily.
This depends on whether the company is itself a party to the agreement and on the nature of the particular obligation.
If the company has entered into the shareholders’ agreement, contractual obligations may potentially arise for the company, subject to applicable company law.
Section 42 of the Companies Act 2014 deals with the manner in which contracts can be made on behalf of a company and provides that a contract made in accordance with that section binds the company and its successors and the other parties to it.
This is another reason why a shareholders’ agreement should clearly identify the parties and be properly executed.
A shareholders’ agreement and a company constitution are not the same thing.
This distinction can become extremely important when a dispute arises.
The constitution is the company’s formal constitutional document.
Section 31 of the Companies Act 2014 provides, subject to the Act, that a registered constitution binds the company and its members to the same extent as if it contained covenants by the company and each member to observe its provisions and the relevant governance provisions of the Act.
A shareholders’ agreement, by contrast, is a contractual arrangement between its parties.
There are also important practical differences.
A company’s constitution is registered, whereas a shareholders’ agreement will generally remain a private contractual document.
The constitution may also be amended in accordance with company law. Section 32 of the Companies Act 2014 provides, subject to the Act, for amendment of a constitution by special resolution.
This makes it important that the shareholders’ agreement and constitution are drafted to work together.
This can be a complicated area.
A shareholders’ agreement cannot simply override mandatory provisions of the Companies Act 2014.
There can also be an important distinction between:
what the company is legally entitled to do as a matter of company law, and
what a shareholder has contractually promised another shareholder that they will or will not do.
For example, an action may potentially be valid from a corporate perspective while nevertheless placing a shareholder in breach of a separate contractual obligation under the shareholders’ agreement.
That distinction can have significant consequences when determining the appropriate remedy.
This is why shareholders should avoid treating the shareholders’ agreement and constitution as unrelated documents.
When a shareholders’ agreement is being prepared or updated, the constitution should generally be reviewed at the same time.
A breach of a shareholders’ agreement can arise in many different ways.
Common disputes include allegations that a shareholder has:
The agreement may require shares to be offered to existing shareholders first under pre-emption provisions.
A shareholder attempting to sell directly to an outside party could potentially breach those contractual obligations.
A shareholders’ agreement may provide that certain important decisions require unanimous approval or a specified shareholder majority.
A dispute can arise if one shareholder attempts to proceed without obtaining that consent.
Shareholders may have access to commercially sensitive information about the company.
Unauthorised disclosure or use of that information can lead to a serious dispute.
A departing shareholder may be subject to contractual restrictions concerning competition, customers, employees or confidential information.
Whether a particular restrictive covenant is enforceable will depend on its terms and the applicable legal principles.
The agreement may provide that certain events require a shareholder to offer or transfer their shares.
Disputes can arise over whether a triggering event has occurred and the price payable for the shares.
Where a shareholder also works in the business, the agreement may regulate what happens to their shares when their employment or involvement ends.
These provisions can generate substantial disputes, particularly where the classification of the departing shareholder affects the price payable for their shares.
A 50/50 shareholders’ agreement may contain a procedure for resolving shareholder deadlock.
If one shareholder refuses to participate in that process, enforcement issues can arise.
The appropriate response depends on the nature and seriousness of the breach.
The first step should usually be to review the agreement carefully.
Particular attention should be paid to:
A formal solicitor’s letter may sometimes be sufficient to identify the breach and require compliance.
In other cases, negotiation or mediation may provide a commercial solution.
Where the breach is serious or urgent, court proceedings may need to be considered.
Depending on the circumstances, urgent court relief may potentially be necessary.
Imagine that a shareholder is about to take an action which another shareholder says would breach the agreement and cause damage that cannot adequately be addressed afterwards.
The affected shareholder may need advice on whether an injunction or other urgent court relief should be sought.
Applications for injunctions involve specific legal tests and are highly fact-dependent.
Timing can be critical.
A shareholder who becomes aware of a threatened breach should therefore obtain advice promptly rather than waiting until the transaction or disputed action has been completed.
Depending on the circumstances, a party may seek contractual remedies including damages or, in appropriate cases, equitable remedies such as an injunction or specific performance.
The appropriate remedy will depend upon the particular obligation and breach.
For example, a claim involving the transfer of shares may raise different issues from a claim involving a breach of confidentiality or an obligation to make a payment.
A court will not necessarily make an order compelling performance merely because a contractual breach has occurred.
The particular facts, contractual wording and applicable legal principles must be considered.
A shareholder who suffers financial loss as a result of a contractual breach may potentially seek damages for breach of the shareholders’ agreement, subject to the usual legal requirements governing contractual damages.
However, damages are not always the principal objective in a shareholder dispute.
A shareholder may instead want to:
The legal strategy should therefore begin with the commercial outcome the shareholder actually wants to achieve.
A breach of the shareholders’ agreement may form only one part of a wider dispute.
For example, a minority shareholder might allege that the majority shareholders have:
In appropriate circumstances, conduct of this nature may raise issues beyond a straightforward contractual claim.
Section 212 of the Companies Act 2014 provides an important statutory remedy where the affairs of a company are being conducted, or directors’ powers are being exercised, in a manner oppressive to a member or in disregard of their interests as a member.
A shareholder dispute can therefore involve both contractual rights under a shareholders’ agreement and statutory minority shareholder protections.
The appropriate claims and remedies will depend on the circumstances.
Enforcement questions can become particularly important where a company has two 50% shareholders.
Neither shareholder may have sufficient voting power to resolve a fundamental disagreement without the other.
A well-drafted 50/50 shareholders’ agreement should contain a deadlock mechanism.
This may involve escalation between the parties, mediation, expert determination or a mechanism through which one shareholder ultimately acquires the other’s shares.
Where one shareholder refuses to follow the agreed deadlock procedure, the precise wording of the agreement will need to be examined to determine whether and how the provision can be enforced.
Without an effective deadlock clause, a serious 50/50 shareholder dispute can leave the company unable to make important decisions.
Shareholders’ agreements frequently contain restrictions relating to competition, solicitation of customers or employees and use of confidential information.
These clauses should not be assumed to be automatically enforceable simply because the shareholder signed the agreement.
The enforceability of a restrictive covenant will depend on the particular provision and circumstances, including its scope and the interests it seeks to protect.
An excessively broad restriction may face challenge.
Restrictive covenants should therefore be carefully drafted for the particular business rather than copied from a standard shareholders’ agreement template.
A shareholders’ agreement should not be signed and forgotten.
A company may look very different ten years after the agreement was originally prepared.
New shareholders may have joined.
Founders may have left.
The company may have raised investment, created new classes of shares, expanded internationally or changed its management structure.
An agreement drafted for two founders may no longer work effectively where there are five shareholders and outside investors.
Businesses should therefore review their shareholders’ agreement when significant changes occur.
It is considerably easier to update an agreement while the shareholders remain aligned than to discover its shortcomings after a dispute has arisen.
There are several practical steps shareholders can take when preparing or reviewing an agreement.
The agreement should:
Ambiguity is particularly dangerous.
A clause intended to prevent a shareholder dispute can become the subject of the dispute itself if the parties cannot agree on what it means.
Yes, a properly entered into shareholders’ agreement can generally be legally binding and enforceable in Ireland.
However, enforcement is not simply a matter of producing a signed document and demanding that every provision be followed.
The legal position may depend on:
Where a breach is threatened or has already occurred, obtaining legal advice early can be particularly important.
Delay may reduce the practical options available, especially where shares are about to be transferred, a significant corporate decision is imminent or urgent injunctive relief may need to be considered.
Sherwin O’Riordan Solicitors advises shareholders, founders, directors and companies on the preparation, interpretation and enforcement of shareholders’ agreements in Ireland.
We advise on disputes involving breach of shareholders’ agreements, share transfers, pre-emption rights, reserved matters, good leaver and bad leaver clauses, restrictive covenants, shareholder deadlock, shareholder buyouts and minority shareholder rights.
We also advise on Section 212 Companies Act 2014 shareholder oppression claims and other disputes between shareholders and business partners.
If you believe another shareholder has breached your shareholders’ agreement—or you have been accused of a breach—obtaining advice at an early stage can help identify your rights, your potential remedies and the most commercially appropriate way to resolve the dispute.
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