Is a Shareholder’s Agreement Legally Binding?

Disputes among a company’s shareholders will inevitably require a close review of the company’s governance documents. The shareholder’s agreement in a corporation plays a central role in most ownership disputes. This agreement may be known as an operating agreement if you have a limited liability company or “LLC.”

In this article, our Colorado business litigation attorneys will cover the basics of shareholder’s agreements. We’ll cover what these agreements can address and whether the signatories are legally bound by them.

What Is a Shareholder’s Agreement and Why Is it Important in Colorado?

Shareholder’s agreements are written documents signed by two or more shareholders of a close corporation or S-corporation. It describes the shareholder’s rights and obligations and explains—sometimes in conjunction with corporate bylaws and/or articles of incorporation—the rights of shareholders, any limits on the powers of officers to take action without shareholder approval, and how the shareholders can influence the company’s operations. Again, operating agreements can perform a similar function for LLCs.

Broadly, the goal of a shareholder’s agreement is to reduce uncertainty within a company that’s owned by multiple people. The agreement addresses issues that frequently cause conflict among shareholders, such as:

What happens if a shareholder becomes incapacitated, dies or retires?
May a shareholder sell their shares in the event that the shareholder wants to leave the company?
Are there limits on action that the officers of the company can take without shareholder approval, such as buying or selling major assets?

A shareholder’s agreement is not the same as the articles of incorporation or bylaws. Articles are necessary to legally establish the company and are filed with the state. Bylaws require the company to follow certain rules, such as holding an annual shareholder’s meeting.

Are Shareholder’s Agreements Legally Enforceable in Colorado?

Shareholder’s agreements are contracts and are subject to general rules of contract law. If a court finds that the agreement complies with the law, shareholders who fail to uphold their duties could be considered in breach.

The remedies for breach of contract vary by case. In some situations, the shareholder’s agreement itself may prescribe or limit the available remedies. Among the many possible outcomes are:

An award of monetary damages for breach of the shareholder agreement.
The court ordering a party to carry out the terms of the contract (“specific performance”)
The court ordering a party to stop doing the act that violates the contract (“injunction”)
The appointment of a receiver for the company.

Protect Your Rights With Help From Our Denver Law Firm

The business litigation group at Keating Wagner Polidori Free has decades of experience in shareholder disputes. Our attorneys will fight to protect your rights and your company if you ever have an issue involving a shareholder’s agreement. Call our Denver firm at 303-534-0401 or contact us online to schedule a meeting.