Breach of Shareholders Agreement: How to Bring a Claim

What Is a Shareholders’ Agreement?

A shareholders’ agreement is a private contract between the shareholders of a company, and often the company itself, that governs the commercial relationship between them. It typically addresses matters that the articles of association alone do not cover adequately: voting arrangements and decision-making rights, dividend policy, the remuneration of shareholder directors, management roles and responsibilities, share transfer restrictions and pre-emption rights, exit mechanisms, what happens on the death or incapacity of a shareholder, and how disputes between shareholders are to be resolved.

Unlike the articles of association, a shareholders’ agreement is not a public document and does not form part of the company’s formal constitution. It creates personal contractual rights and obligations enforceable between the parties to it under ordinary contract law. This privacy is one of its key advantages: the terms of the commercial arrangement between the shareholders remain confidential to the parties, without being publicly accessible on the Companies House register.

This page is part of the Shareholder Disputes Knowledge Guide. If you need legal advice on a shareholder dispute see my direct access barrister page.

How a Breach of Shareholders’ Agreement Differs from an Unfair Prejudice Petition

A breach of shareholders’ agreement claim is a fundamentally different type of proceeding from an unfair prejudice petition, even though both arise from shareholder disputes and often overlap in practice.

An unfair prejudice petition is a corporate remedy that involves broader equitable considerations. The court has wide discretion to grant whatever relief it considers appropriate to address the unfair prejudice identified. The court looks at the overall fairness of the position across the history of the relationship between the shareholders and their legitimate expectations, whether or not those expectations were ever formally documented.

A breach of shareholders’ agreement claim is a contractual claim. The court looks at what the agreement says, decides whether a breach has occurred, and considers what remedy is appropriate to compensate the claimant for the loss caused by the breach. There is no broad equitable discretion of the kind that operates in unfair prejudice proceedings. The focus is on the specific terms of the contract and whether they have been broken.

In practice, many shareholder disputes involve both types of claim simultaneously. A breach of a shareholders’ agreement may also constitute unfair prejudice within the meaning of Section 994 of the Companies Act 2006, and the two routes to relief may be pursued in parallel or as alternatives depending on the specific facts and the remedies being sought.

What Can Amount to a Breach?

Any failure to comply with a specific obligation in the shareholders’ agreement that causes loss to the other party can amount to a breach. Common examples include failure to comply with pre-emption provisions when shares are transferred, voting shares in breach of agreed voting arrangements, taking decisions that require unanimous consent or specific majority approval without obtaining it, failing to comply with agreed dividend policy, paying remuneration in excess of agreed limits, competing with the company in breach of non-compete provisions, and failing to comply with agreed exit mechanisms when a trigger event occurs.

Because shareholders’ agreements often cover a wide range of governance and commercial matters, the scope for potential breaches is broad. The strength of any claim depends critically on the clarity and completeness of the agreement’s drafting. A well-drafted shareholders’ agreement that clearly addresses the situation in dispute provides a firm foundation for a contractual claim. A poorly drafted or ambiguous agreement may leave the parties in dispute about what the terms actually mean, which itself becomes the subject of litigation.

Remedies for Breach of Shareholders’ Agreement

The main remedies for breach of a shareholders’ agreement are damages and injunctive relief, and in many cases injunctions are more valuable than damages.

Damages are intended to put the claimant in the position they would have been in had the agreement been performed. This might include financial loss caused directly by the breach, loss of value, or loss of a contractual right. In practice, quantifying damages in shareholders’ agreement cases can be difficult, particularly where the loss relates to share value or future commercial opportunities rather than a simple sum of money.

Injunctions are often more immediately important. A shareholder may ask the court for an order preventing a breach from continuing, requiring compliance with the agreement, or preventing a threatened breach before it occurs. For example, an injunction might be sought to prevent an unauthorised share transfer, to enforce voting arrangements, to require compliance with agreed consent provisions, or to stop a shareholder from competing in breach of a non-compete clause. Where the breach is ongoing or threatened, the ability to obtain injunctive relief quickly can be decisive.

Specific performance, a court order requiring a party to perform their contractual obligations, may also be available in some cases where damages would be an inadequate remedy.

Time Limits

Unlike unfair prejudice petitions, breach of shareholders’ agreement claims are governed by the Limitation Act 1980. Where the agreement was executed as an ordinary contract, the limitation period is six years from the date of breach. Where the agreement was executed as a deed, the period is twelve years. Once the limitation period has passed, the claim is statute-barred and cannot be brought.

Delay in bringing a claim, even before the limitation period has run, can also weaken the position of the claimant, particularly where equitable remedies such as injunctions or specific performance are sought. Courts are less sympathetic to applicants who have allowed a situation to continue for a long time before seeking the court’s intervention. For more detail on time limits see the chapter on time limits for bringing proceedings.

The Relationship Between the Shareholders’ Agreement and the Articles

Shareholders’ agreements and articles of association operate in parallel and sometimes in tension. Many shareholders’ agreements require shareholders to exercise their voting rights to ensure that the articles remain consistent with the agreement. Where there is a conflict between the two, the shareholders’ agreement will usually take precedence as between the parties to it, even though the articles continue to govern the company’s constitutional position more generally.

This distinction matters in practice because third parties, such as incoming shareholders who are not parties to the original agreement, are bound by the articles but not necessarily by a shareholders’ agreement they did not sign. The relationship between the two documents must be carefully managed when new shareholders are admitted to the company.

Why a Well-Drafted Shareholders’ Agreement Matters

The single most effective way to protect shareholders’ rights and prevent disputes from becoming costly litigation is a clear, comprehensive and well-drafted shareholders’ agreement that addresses the key risk areas from the outset. Disputes most often arise in the areas that the agreement failed to address, addressed ambiguously, or failed to keep current as the company evolved. An investment in good drafting at the start of a commercial relationship is significantly less expensive than the litigation that results from inadequate documentation.

Published Resources

My book Shareholder Disputes: A Practical Guide for Business Owners, Directors and Family Businesses addresses breach of shareholders’ agreement claims alongside the full range of other shareholder dispute remedies, explaining how the different routes to relief interact and how to assess which approach best serves the specific situation of the shareholder concerned.

See all books.

Frequently Asked Questions

Do all companies have a shareholders’ agreement?

No. Many companies, particularly small and early-stage businesses, operate without a formal shareholders’ agreement. In those circumstances the relationship between shareholders is governed by the articles of association and by the general law of companies. The absence of a shareholders’ agreement is one of the most common reasons why shareholder disputes become difficult and expensive, because there is no agreed framework for resolving the issues that have arisen.

Can a shareholders’ agreement be enforced against a new shareholder who did not sign it?

Generally no, unless the new shareholder has separately agreed to be bound by it, for example by signing a deed of adherence. This is one of the reasons why it is important to require all new shareholders to adhere formally to the shareholders’ agreement when they acquire shares.

What is the difference between a shareholders’ agreement claim and an unfair prejudice petition?

A shareholders’ agreement claim is a contractual claim that focuses on the specific terms of the written agreement and whether they have been breached. An unfair prejudice petition is a corporate remedy that involves broader equitable considerations and gives the court wide discretion to address unfairness in how the company has been run, including informal understandings and expectations that may go beyond the written documents. In many disputes both routes are available and may be pursued simultaneously.

What if I do not have a shareholders’ agreement but I had a verbal arrangement with the other shareholders?

Verbal arrangements between shareholders can be legally enforceable in some circumstances, though they are significantly harder to prove than written agreements. Where the verbal arrangement goes to the basis of the commercial relationship between the shareholders, and there is evidence of what was agreed, it may also support an unfair prejudice petition by establishing the legitimate expectations of the minority shareholder. Early legal advice is essential in these situations.

Get in Touch

If you believe your shareholders’ agreement has been breached, or if you want to understand your options before a dispute escalates further, I would be glad to discuss your situation.

Call 020 4538 0246, use the contact form below, or book a call directly.

Important disclaimer: This page is provided for general information and educational purposes only and does not constitute legal advice. The content may not be legally accurate for your specific situation. You must not rely on anything on this page in respect of your legal rights. The law in this area relates to companies registered in England and Wales only. Always seek independent legal advice from a qualified specialist before taking or refraining from taking any action. The author accepts no responsibility for any decisions made or outcomes arising from use of this material. If you would like specific advice on your situation, contact me here.

How Can I Bring a Claim for Breach of a Shareholders’ Agreement?