Shareholders’ Agreements: A Firm Basis for a Successful Relationship
A Shareholders’ Agreement is necessary where two or more parties wish to carry on business together through a limited liability company, and as such they wish to regulate the relationship between shareholders and determine the actions in the case of deadlock.
Through the use of a Shareholders’ Agreement, the Parties can achieve greater protection of the rights of minority Shareholders, quick resolution of deadlocks, sufficient regulation of the rights of entry, or exit, of shareholders in the Company, as well as secure methods of valuation of the fair value of the shares of the Company and so forth. As the Shareholders’ Agreement has the additional advantage of not being available to public, unlike the Company’s constitution (Memorandum and Articles of Association), sensitive information and details, regarding the role of the parties in the Company’s management, their obligations and rights etc. may be set out in the Shareholders Agreement.
Consequently, if such an agreement is not existent, it can lead to serious problems and disputes and can ultimately result in corporate failure. The Company would be controlled solely and exclusively by the exercise of shareholding or directorship rights, through its constitution, and the Cyprus Companies Laws, which are generally insufficient to protect the rights and interests of shareholders.
The Company itself is also a party to the Shareholders’ Agreement, and in case of conflict between the terms of the Articles of Association and the terms of the Shareholders Agreement, as far as contractual liability is concerned, the terms of the latter prevail and have superior effect.
Significantly, the Shareholders’ Agreement may contain certain provisions regulating certain key matters such as the degree of involvement which shareholders retain within the company through an applicable ‘Reserved Matters’ clause, mechanisms of resolution of deadlock leading to the buy-out of specified shareholder(s) in the event of a deadlock, non-competition clauses preventing shareholders from setting up a competing business to the Company and dispute resolution clauses.
In conclusion, a Shareholder’s Agreement is a valuable tool, for providing a procedural framework, in order to regulate and govern the internal management of a company.
For more detailed information on drafting a tailor-made Shareholders’ Agreement, contact our team of specialists at Parparinos Milonas Corporate and Legal Consultants.