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Shareholder Disputes: Can a written shareholders' agreement be orally modified or is it necessary to execute a written amendment?

The Fourth District Court of Appeal recently addressed a shareholders’ dispute in the case ofP.D.K., Inc. v. Madeline and William McConnell. In P.D.K., shareholders (the McConnells) filed an action to permit inspection of corporate records. The corporation contended that the McConnells were not entitled to receive the records because they were no longer shareholders of the corporation. The corporation maintained that the McConnells forfeited their shares based upon an alleged oral modification to the shareholders’ agreement calling for a forfeiture of stock shares for those shareholders whom refused to infuse additional monies into the corporation. However, the shareholders’ agreement had no written provision for forfeiture of shares for any reason and had a provision which required all modifications of the shareholders’ agreement to be in writing and signed by the parties.

The court in P.D.K. reaffirmed that it is possible for a written shareholders’ agreement, like any other written contract containing a provision requiring modifications of the contract to be in writing and signed by the parties, to be orally modified, however, it set forth certain requirements that must be met to establish an oral modification. These requirements include: (a) that the parties agreed upon and accepted the oral modification; and (b) that both parties (or at least the party seeking to enforce the amendment) performed consistent with the terms of the alleged oral modification (not merely consistent with their obligations under the contract); and (c) that due to plaintiff’s performance under the contract as amended the defendant received and accepted a benefit that it otherwise was not entitled to under the original contract (i.e., independent consideration).

Ultimately, the court in P.D.K found that the corporation failed to present any evidence to even meet the first requirement necessary to prove the existence of an oral modification: i.e., that the McConnells ever mutually assented and agreed to the oral modification. The court also found it noteworthy that the McConnells presented an affidavit attesting that they never mutually assented to the oral modification.

Thus, as can been seen from the case of P.D.K., establishing an oral modification of a written contract is not an easy task. It may involve protracted litigation especially since summary judgment may be unavailable due to disputed factual issues between the contracting parties as to whether mutual assent for the alleged oral modification existed. Thus, even though oral modifications of written shareholders’ agreements and other written contracts are permissible if certain requirements are met, the best practice to avoid litigation is to is modify a shareholders’ agreement, or any written contract, in writing in the form of an amendment signed by the parties. Contact Rosenthal Law Group to help you in litigating shareholders disputes and to guide you through the process of amending your contract or shareholders’ agreement.