The Court of Appeal answered this question in the recent case of Kulkarni v Gwent Holdings Ltd and Anor [2025] EWCA Civ 1206. The Court’s decision provides helpful guidance to Shareholder Agreement parties facing serious breaches of those Agreements by other shareholders.
The Court also considered whether a Board notice to the breaching shareholder to remedy such breaches was required to activate the Shareholders’ Agreement’s deemed share transfer clause. This Board notice would require the breaching shareholder to remedy its breach. If the shareholder did not remedy the breach within the deadline, then it would be deprived of all of its shares. Those shares would then automatically transfer to the other shareholder (the deemed share transfer).
The Parties, the Deemed Share Transfer Clause and the Shareholders’ Agreement Breaches
St Joseph’s Independent Hospital Limited (“the Company”), owned the private hospital of that name. The Company entered into a Shareholders’ Agreement with its two shareholders; Mr Kulkarni (a surgeon at the hospital), and an investment company, Gwent Holdings Limited (“Gwent”).
The Shareholders’ Agreement contained a deemed share transfer clause, containing wording which we see often in Shareholders’ Agreements:
“A Shareholder is deemed to have served a Transfer Notice under clause 6.4 immediately before any of the following events:…
(d) the Shareholder committing a material or persistent breach which, if capable of remedy, has not been remedied within 10 Business Days of notice to remedy the breach being served by the Board (acting with Shareholder Consent”).
Gwent admitted that it had committed material and persistent breaches of the Shareholders’ Agreement against Mr Kulkarni. These comprised:
- refusing to accept as a director the individual nominated by Mr Kulkarni,
- allotting to itself Mr Kulkarni’s shares (except for one), and
- unlawfully terminating the Shareholders’ Agreement.
Gwent’s admission that these breaches were material and persistent raised the question of whether they were capable of remedy under the deemed share transfer clause. If they were, then the Board would need to serve a notice on Gwent to remedy the breaches, and if Gwent did not comply with any notice then Mr Kulkarni would acquire Gwent’s shareholding.
However, the Board did not serve any notice. Gwent then reversed its two breaches. It accepted Mr Kulkarni’s nominated director. Gwent also returned the share allotment so that Mr Kulkarni could receive the correct number of his allotted shares. These steps also reversed Gwent’s termination of the Shareholders’ Agreement, which was reinstated.
The Court of Appeal Decision
Mr Kulkarni argued that the admitted breaches could not be remedied. As a result, there had been no need for the Company’s Board to serve a notice on Gwent to remedy the breach. This meant that the deemed share transfer position operated automatically to transfer to him all of Gwent’s shares in the Company.
Gwent disagreed. It argued that its breaches were capable of remedy. In fact it had already remedied them. Also the Board had never served it with a notice to remedy. So there could not be any deemed transfer of shares to Mr Kulkarni.
The Court of Appeal considered 3 issues:
- Does a material or persistent breach automatically trigger a deemed share transfer, or was a Board notice to remedy required?
- Can material and persistent breaches of contract ever be remedied?
- Were Gwent’s breaches capable of being remedied, and, in this case, remedied?
Was a Board Notice of Remedy required to activate the Deemed Share Transfer?
The Court of Appeal agreed with Gwent’s argument. The judge confirmed that in the case of a remediable breach, the Company’s Board did have to serve on Gwent a notice to remedy the breach. Failing this there would be no deemed transfer of its shares to Mr Kulkarni. The Board’s failure to serve a notice meant ultimately that the deemed transfer of Gwent’s shares to Mr Kulkarni had not been activated.
Were Gwent’s Breaches in this Case Capable of Remedy?
The Court of Appeal said “yes”. Gwent’s breaches were capable of remedy, and in fact it had remedied them. It was irrelevant that Gwent required more than 10 days to remedy its breaches. The Board had not served a notice to remedy, so there was no valid deadline.
The Court of Appeal also confirmed that:
- A remedy is a “cure so that matters are put right for the future”, and
- Not all breaches of Shareholders’ Agreements will be capable of remedy: continuing prejudice to the victim may mean that a breach cannot be remedied.
Can Material and Persistent Breaches of a Shareholder Agreement be remedied?
The Court of Appeal explained that when considering whether the breach of a contractual clause such as the deemed share transfer clause is remediable, the court should adopt a practical approach. Not a technical approach.
But if there is no such termination clause in the contract then the position is different. In that case the question is whether a party has committed a repudiatory breach of the contract. This is a breach which is so serious that the victim has the option of whether to terminate the contract and claim damages. Alternatively it can continue with the contract and claim damages if available. But in this second scenario any action taken by the contract breaker is irrelevant. The breach cannot be remedied. The victim of the breach alone retains the right to decide whether to terminate the contract or to continue with it.
How 3CS can help
Our expert dispute resolution solicitors provide strategic and effective assistance in resolving shareholder agreement disputes. For assistance, please get in touch with your usual 3CS contact.
