A shareholders' agreement, SHA in short is an agreement amongst the shareholders
of a company. In strict legal theory, the
relationships amongst the shareholders and those between the shareholders and
the company are regulated by the constitutional documents of the company;
however, where there are a relatively small number of shareholders, like in a
Startup company, it is quite common in practice for the shareholders to
supplement the constitutional document. There are a number of reasons why the
shareholders may wish to supplement the constitutional documents of the company
in this way: a company's constitutional documents are
normally available for public inspection, whereas the terms of a
shareholders' agreement, as a private law contract, are normally confidential
between the parties. contractual arrangements are generally
cheaper and less formal to form, administer, revise or terminate.
the shareholders might wish to provide for disputes to be resolved by
arbitration, or in the courts of a foreign country. In some countries,
corporate law does not permit such dispute resolution clauses to be
included in the constitutional documents.
greater flexibility; the shareholders may anticipate that the company's
business requires regular changes to their arrangements, and it may be
unwieldy to repeatedly amend the corporate constitution.
corporate law in the relevant country may not provide sufficient protection
for minority shareholders, who may seek to better protect their position by
using a shareholders' agreement to provide mechanisms for removing
minority shareholders which preserve the company as a going concern.
Risks There are also certain risks which can
be associated with putting a shareholders' agreement in place in some
countries. In some countries, using a shareholders'
agreement can constitute a partnership, which can have unintended tax
consequences, or result in liability attaching to shareholders in the event
of a bankruptcy. Where the shareholders' agreement is
inconsistent with the constitutional documents, the efficacy of the parties'
intended arrangement can be undermined. Countries with notarial formalities,
where notarial fees are set by the value of the subject matter, parties can find
that their agreement is subject to prohibitively high notarial costs,
which, if they fail to pay, would result in the agreement being unenforceable.
In certain circumstances, a shareholders' agreement can be put
forward as evidence of a conspiracy and/or monopolistic practices.
Common characteristics Shareholders' agreements obviously vary
enormously between different countries and different commercial fields.
However, in a characteristic joint venture or business startup, a
shareholders' agreement would normally be expected to regulate the following
matters: regulating the ownership and voting
rights of the shares in the company, including
Lock-down provisions restrictions on transferring shares, or
granting security interests over shares pre-emption rights and rights of first
refusal in relation to any shares issued by the company
"tag-along" and "drag-along" rights minority protection provisions
control and management of the company, which may include
power for certain shareholders to designate individual for election to the
board of directors imposing super-majority voting
requirements for "reserved matters" which are of key importance to the
parties imposing requirements to provide
shareholders with accounts or other information that they might not
otherwise be entitled to by law making provision for the resolution of
any future disputes between shareholders, including
deadlock provisions dispute resolution provisions
protecting the competitive interests of the company which may include
restrictions on a shareholder's ability to be involved in a competing business
to the company restrictions on a shareholder's ability
to poach key employees of the company key terms with suppliers or customers
who are also shareholders In addition, shareholders agreements
will often make provision for the following:
the nature and amount of initial contribution to the company
the proposed nature of the business how any future capital contributions or
financing arrangements are to be made the governing law of the shareholders'
agreement ethical practices or environmental
practices allocation of key roles or
responsibilities Registration
In most countries, registration of a shareholders' agreement is not required
for it to be effective. Indeed, it is the perceived greater flexibility of
contract law over corporate law that provides much of the raison d'être for
shareholders' agreements. This flexibility, however, can give rise
to conflicts between a shareholders' agreement and the constitutional
documents of a company. Although laws differ across countries, in general most
conflicts are resolved as follows: as against outside parties, only the
constitutional documents regulate the company's powers and proceedings.
as between the company and its shareholders, a breach of the
shareholders' agreement which does not breach the constitutional documents will
still be a valid corporate act, but it may sound in damages against the party
who breaches the agreement. as between the company and its
shareholders, a breach of the constitutional documents which does not
breach the shareholders' agreement will nonetheless usually be an invalid
corporate act. characteristically, courts will not
grant an injunction or award specific performance in relation to a
shareholders' agreement where to do so would be inconsistent with the company's
constitutional documents. Footnotes
External links Shareholders' Agreement Guide - English
and Welsh law