Does the SHA Prevail Over the Articles of Association?

In business practice, the shareholders often enter into a separate agreement between themselves, commonly referred to as a shareholders’ agreement (“SHA”).

Such an agreement usually regulates their mutual relations in greater detail and sets out specific rules for the exercise of voting rights beyond those arising directly from the articles of association or from the law.

The law permits such agreements and gives shareholders considerable contractual freedom. However, the situation becomes more complicated when such an agreement conflicts with the articles of association. A typical example is where a shareholder votes at the general meeting in accordance with the articles of association, but contrary to what they had previously undertaken in the SHA.

The Czech Supreme Court recently addressed this issue in its decision no. 27 Cdo 2390/2025.

Breach of the SHA and Invalidity of a General Meeting Resolution on Profit Distribution

In the present case, one of the shareholders sought a court ruling declaring the general meeting’s resolution on profit distribution invalid. The shareholder argued that the resolution was invalid because the other shareholders had voted in breach of their prior agreement under the SHA. He considered such conduct to be contrary to good morals and therefore sought to have the resolution set aside. This argumentation might have appeared relevant in light of the resolution of the High Court in Prague (case No. 7 Cmo 23/2025), which, in general terms, admitted that a breach of  the SHA may constitute grounds for declaring a resolution of a company body invalid due to its conflict with good morals.

However, according to the opinion of the Supreme Court expressed in the present case, failure to comply with the SHA when voting will generally not constitute grounds for declaring a resolution of the general meeting invalid. It noted that while the SHA is generally permissible, it exists alongside the articles of association and does not amend them. Therefore, a resolution adopted by the general meeting in compliance with the articles of association and the resolution cannot be deemed invalid merely because it conflicts with the SHA.

What Is the Role of an SHA, Then?

This raises the question of what SHAs are actually used for and why their provisions are not included directly in the articles of association. The main reason is confidentiality.

While the articles of association must be filed in the Collection of Deeds and are publicly accessible, the SHA remains a private document. This allows shareholders to address more sensitive matters, such as the allocation of competences among shareholders, rules for the appointment of statutory bodies, company financing, the resolution of deadlock situations, specific voting strategies, non-compete obligations, internal plans for a potential future sale of the company, the regulation of share transferability including tag along rights (the right of a minority shareholder to join in the sale of a share) and drag along rights (the right of a majority shareholder to compel minority shareholders to sell their shares), as well as the arrangement of options for share transfers, including penalty options.

However, not all provisions of the SHA are inherently valid and effective. Their invalidity may arise, in particular, from conflicts with mandatory provisions of law, principles of good morals, or public policy. Particularly problematic are provisions that improperly interfere with the duty of members of statutory bodies to act with due care and diligence, as well as arrangements affecting persons who are not parties to the agreement, or the company, if it is not a party to the SHA.

Enforceability of an SHA

In practice, it is important to clearly understand the consequences of breaching an SHA and the remedies available. As confirmed by the cited Supreme Court decision, the appropriate response to such a breach is not to challenge the validity of a general meeting resolution.

These three instruments are commonly used to ensure compliance with the SHA: a contractual penalty, claims for damages, and, where appropriate, forced or punitive transfer of the ownership interest.

Although the Supreme Court in this case pointed to damages as one of the means of protecting a shareholder’s rights in the event of a breach of the SHA, it should be noted that such claims are often difficult to enforce in practice. In particular, it may be problematic to prove the occurrence of damage, the causal link, and its specific amount, which can significantly limit its application in practice.

For this reason, shareholders prefer to include contractual penalties in SHA. Their enforcement is triggered merely by the breach of a contractual obligation. In practice, it is also quite common to combine these instruments, with shareholders agreeing, alongside a contractual penalty, on a right to claim damages to the extent they exceed the agreed penalty.

Conclusion for Practice

For the SHA to be valid and enforceable, particularly with regard to sanctions for its breach, it is essential that it is always drafted in cooperation with an attorney. Not all provisions are legally permissible, and poorly drafted wording may lead to the invalidity of the agreed rules. An experienced attorney can establish valid mechanisms governing the relationships between shareholders and select appropriate sanctioning provisions for breaches of the agreed rules.