Remedies Against Breach of a Shareholder’s Agreement

Shareholder’s agreements are only binding inter-parties, in other words, they are only binding on the signing parties and in principle they do not have effects on third parties. The partners participating in the agreement are bound to the commitments assumed, which means that the agreement is directly opposable with respect to those partners. For this reason, a breach of a shareholder’s agreement will result in the corresponding actions for breach of contract.

Parts of both Spanish doctrine and the jurisprudence argue that when the contract has been signed by each and every partner, the contract is then enforceable even against the company. Thus, all the acts of the company contrary to the contract (for example, the adoption of a social agreement adopted without respecting the reinforced majorities provided for in the private partnership agreement) could then be challenged.

Remedies against the breach of a shareholder’s agreement

Spanish law offers various remedies against the breach of a shareholder’s agreement. We are going to highlight some of them:

Actions for damages

Actions for damages is the main remedy and consists of obtaining monetary compensation as a way to repair the damages caused by the breach of a shareholder’s agreement. However, in practice, the issue with this remedy is that it is indeed very difficult to prove and quantify the real damage caused by the infringement of the agreement, and it is even more difficult in abstract situations or in situations with special complications (for example, it is quite hard to determine the suffered damages in the case of a breach of the duty to inform the partners about the development of the business).

For this reason, it is common and advisable to establish beforehand in the shareholder’s agreement a specific amount of compensation to be paid by the defaulting party in case of an actual breach of the agreement. This way the damages are previously quantified and future problems regarding the establishment of damages are avoided. Under Spanish law, this is what is called a penalty clause (Article 1.152 of the Civil Code).

Action of fulfillment

Another remedy consists in the possibility of making a judicial claim for specific performance of the benefit actually due or of the obligation actually due, in other terms, to compel the defaulting party to perform the specific action or to deliver the thing the party was bound to deliver (for example, to vote in a certain way in a general meeting of shareholders, to sell his/her shares to another partner, etc.).

Removal action

This action basically consists in a request to remove the situation caused by the breach (for example, to cancel the social agreement adopted with the vote casted by a defaulting partner in violation of the shareholder’s agreement).

Action of resolution

In case of a fundamental and vital breach of the contract by some of the partners, there is also the possibility of definitively dissolving the contract among the partner and hence to undo the commitments initially agreed upon.

Final observations

A shareholder’s agreement is not in any way mandatory, although its use is highly recommended from the very beginning to establish the rules between partners, as well as to ensure the correct functioning of a company. The main purpose is to avoid conflicts and to find an agreement with reasonable problem solving methods, at a moment when such conflicts have not yet arisen.

Its usefulness extends even to startup companies where it is convenient to assure that every partner knows his/her functions and that every partner will remain bound to the company in such a crucial time for the company, as well as in large multinational companies where there is a strong interest in avoiding deadlocks and creating strong protections in the matter of the transmission of shares.

All in all, the shareholder’s agreement plays a fundamental role for business corporations, to the extent that they act as actual preventive tools, providing solutions to problems that will undoubtedly arise among partners and the company in the future. Therefore, having or not having subscribed an agreement among partners can certainly make the difference between the success and the failure of a business.

For further information on the subscription or breach of a shareholder’s agreement or about the requirements of compliance, do not hesitate to contact us.

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Please note that this article is not intended to provide legal advice.

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