shareholders' agreement
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A shareholders' agreement (sometimes referred to in the U.S. as a stockholders' agreement) (SHA) is an agreement amongst the
shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a Trust law, trust or partnership) that is registered by the corporation as the ...
s or members of a
company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...
. In practical effect, it is analogous to a partnership agreement. It can be said that some jurisdictions fail to give a proper definition to the concept of shareholders' agreement, however particular consequences of this agreements are defined so far. There are advantages of the shareholder's agreement; to be specific, it helps the corporate entity to maintain the absence of publicity and keep the confidentiality. Nonetheless, there are also some disadvantages that should be considered, such as the limited effect to the third parties (especially assignees and share purchasers) and alternation of the stipulated articles can be time consuming.


Purpose

In strict legal theory, the relationships amongst the shareholders and those between the shareholders and the company are regulated by the
constitutional documents In relation to juristic persons, the constitutional documents (sometimes referred to as the charter documents) are the documents which define the existence of an entity and regulate the structure and control of that entity and its members. The pre ...
of the company. However, where there are a relatively small number of shareholders, like in a
startup company A startup or start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship refers to all new businesses, including self-employment and businesses that never inten ...
, 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 (or supersede) 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 A contract is a legally enforceable agreement between two or more Party (law), parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, Service (economics), ser ...
, 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 Arbitration is a form of alternative dispute resolution (ADR) that resolves disputes outside the judiciary courts. The dispute will be decided by one or more persons (the 'arbitrators', 'arbiters' or 'arbitral tribunal'), which renders the ' ...
, or in the courts of a foreign country (meaning a country other than the country in which the company is incorporated). 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 formulas for share valuation to cut down on shareholders disputes over the value they can demand for their shares either on voluntary or on compulsory transfers * to restrict the activities of shareholders – preventing abuse of position and competing activities * to provide mechanisms for removing minority shareholders which preserve the company as a
going concern A going concern is a business that is assumed will meet its financial obligations when they become due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the spec ...
.


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 A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, business entity, businesses, interest-based organizations, schoo ...
, which can have unintended
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...
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 An unenforceable contract A contract is a legally enforceable agreement between two or more Party (law), parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of go ...
. * In certain circumstances, a shareholders' agreement can be put forward as evidence of a conspiracy and/or monopolistic practices.


Common characteristics

Shareholders' agreements vary enormously between different countries and different commercial fields. However, in a characteristic joint venture or business
startup A startup or start-up is a company or project undertaken by an entrepreneur Entrepreneurship is the creation or extraction of economic value. With this definition, entrepreneurship is viewed as change, generally entailing risk beyond what is ...
, 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 interest In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the ''Collateral (finance), collateral'') which enables the creditor to have recourse to the property if the deb ...
s over shares **
pre-emption right A pre-emption right, right of pre-emption, or first option to buy is a contractual right Rights are law, legal, social, or ethics, ethical principles of Liberty, freedom or entitlement; that is, rights are the fundamental normative rules about w ...
s and rights of first refusal in relation to any shares issued by the company (often called a '' buy-sell agreement'') ** " 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 A board of directors (commonly referred simply as the board) is an Committee#Executive committee, executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such a ...
** 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 * protecting selling rights of shareholders, including ** Piggy-back clauses In addition, shareholders agreements will often make provision for the following: * the nature and amount of initial contribution (whether capital contribution or other) 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 practicesIt is not uncommon to see shareholders' agreements between parties from developed countries and parties from emerging markets which provide that the company shall not engage in corrupt practices. Although in many countries it may be considered normal for local business to
bribe Bribery is the Offer and acceptance, offering, Gift, giving, Offer and acceptance, receiving, or Solicitation, soliciting of any item of value to influence the actions of an official, or other person, in charge of a public or legal duty. With reg ...
officials to facilitate the conduct of business, many Western countries impose severe penalties on business who engage in corrupt practices abroad, and so Western investors often seek to ensure that their partners do not engage in anything which could breach such legislation in the Western investors' jurisdiction. See for example the
Foreign Corrupt Practices Act The Foreign Corrupt Practices Act of 1977 (FCPA) (, ''et seq.'') is a United States federal law that prohibits U.S. citizens and entities from Bribery, bribing foreign government officials to benefit their business interests. The FCPA is applica ...
in the U.S.A. and the
Bribery Act 2010 The Bribery Act 2010 (c.23) is an Act of the Parliament of the United Kingdom The Parliament of the United Kingdom is the Parliamentary sovereignty in the United Kingdom, supreme Legislature, legislative body of the United Kingdom, the Crow ...
in the UK
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 A contract is a legally enforceable agreement between two or more Party (law), parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, Service (economics), ser ...
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 An injunction is a legal remedy, legal and equitable remedy in the form of a special court order that compels a party (law), party to do or refrain from specific acts. ("The United States courts of appeals, court of appeals ... has exclusive ju ...
or award
specific performance Specific performance is an equitable remedy in the law of contract, whereby a court issues an order requiring a party to perform a specific act, such as to complete performance of the contract. It is typically available in the sale of land law, b ...
in relation to a shareholders' agreement where to do so would be inconsistent with the company's constitutional documents.


Notes

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External links


Shareholders' Agreement Guide - English and Welsh law

Shareholder Agreements: the 30 minute guide
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