A shareholders' agreement is an agreement amongst the shareholders or members of a company. 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 and alternation of the stipulated articles can be time consuming. 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 lawcontract, are normally confidential between the parties.
contractual arrangements are generally cheaper and less formal to form, administer, revise or terminate.
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.
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 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
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.
