Can One Shareholder Sue Another Shareholder For Breach Of Contract?

• Jurisdiction: California,United States
• Law Firm: Allen Matkins Leck Gamble Mallory & Natsis LLP
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Contracts and Commercial Law, Shareholders
• Author: Mr Keith P. Bishop
• Published date: 15 August 2023

One popular theory of the corporation is that it is a nexus of contracts. As Frank Easterbrook and Daniel Fischel pithily pronounced "Corporations are enduring (relational) contracts."F. Easterbrook and D. Fischel, The Economic Structure of Corporate Law, 90 (1991). If that is the case, then it is anomalous indeed that so much corporate litigation involves tort claims (fiduciary duty, fraud, etc.) rather than contract claims.

When it comes to shareholder versus shareholder claims, California practitioners will know that in some circumstances controlling shareholders may owe a fiduciary duty to another shareholder. Thus, the California Supreme Court has held that controlling shareholders may not use their power to control the corporation for the purpose of promoting a marketing scheme that benefits themselves alone to the detriment of the minority. Jones v. H.F. Ahmanson & Co., 1 Cal.3d 93, 115 (1969).

Is it possible that a shareholder could sue another shareholder in contract rather than tort? The answer, of course, will be "yes" if the shareholders are parties to a contract such as a shareholders' agreement. What if there is no such agreement, might there still be a contract? One possibility is the Bylaws. In this earlier...