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How can a shareholder breach their contract?

On Behalf of | May 24, 2023 | BUSINESS & COMMERCIAL LAW - Business & Commercial Law

If your business has shareholders, you should pay attention to their actions. Some business owners focus more on their partners because they have active roles in the company, overlooking shareholders. However, since they own a portion of the company’s stock and have voting rights, their moves can also significantly affect the business.

Here is how a shareholder can breach their contract

Not complying with the agreement’s terms

The contract you sign with your shareholders is a legal agreement and the terms should be observed. A shareholder failing to comply with a term may constitute a breach of contract. Examples include: 

  • Not voting 
  • Not following the written decision-making procedures 
  • A breach of confidentiality requirements 
  • Failing to follow the required steps when selling their shares

Note that you may also breach the shareholder agreement. For example, when you make a decision without the required majority of shareholders. Therefore, you should also be careful to avoid costly mistakes.

What can you do?

A shareholder breaching their contract may lead to a loss to others. Thus, you should act accordingly to protect the company and other shareholders. The first thing to do is to learn more about the breach to make informed decisions. This can protect you from taking action against a party whose act does not constitute a breach.

After confirming a shareholder has breached the agreement’s terms, you may make temporary decisions. For instance, their voting rights can be suspended, if the contract allows it. Then, with adequate information, you can make a permanent decision, which can include removal from the company.

A shareholder may breach their contract, potentially causing the company losses. It may be best to get legal guidance to make the right moves if this happens to you.