Shareholders’ Agreements: A Firm Basis for a Successful Relationship

A Shareholders’ Agreement is normally necessary where two or more parties wish to carry on business together as a limited liability company, and as such they wish to regulate the relationship between shareholders and determine the actions in the case of deadlock. When a company is created, its founding shareholders determine how a company will be owned and managed. This takes the form of a “Shareholders Agreement”.

Furthermore, as new shareholders enter the picture, for instance in the case of the so called “angel” or “silent” investors, probably they will wish to become part of the agreement and they will most likely add additional complexity. This is likely to occur in the event where they want to impose such vesting terms and also such mechanisms as to ensure that they ultimately can exit and get a return on their investment. Additionally, through the use of a Shareholder’s 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 Shareholder’s Agreement, has the additional advantage of not being available to public, unlike the Company’s constitutions, 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. By referring to the company’s constitution we mean the Memorandum and Articles of Association of the Cyprus Company.

The Shareholders Agreement shall be signed by the Company as well as by all registered shareholders of the Company, and in case of conflict between the terms of the Articles of Association and the terms of the Shareholders Agreement, the terms of the latter, prevail and have superior effect.

What is covered by a Shareholder’s Agreement?

Such an agreement will contain certain provisions regulating the following matters:

The Company Structure: Decisions include the composition of the share capital of the Company. That is the authorised share capital and the amount of the issued share capital of the Company.

The appointment and removal of directors: Includes provisions of the existence of specific majorities for the adoption of certain decisions and the restrictions on the powers of the Board of Directors and for the unanimous consent of shareholders, for certain important matters.

Shareholding restrictions and the transfer of shares: Includes pre-emption rights, provisions prohibiting transfers of shares or interests in shares, except in certain situations, the procedure of transfer of shares, and procedures of calculating the fair value for the shares.

Pre-emption rights allow existing shareholders to obtain the shares of a shareholder who wishes to sell his shares before selling them to third parties. This is a clause which is commonly used so as to restrict the entering of third parties to the company and which Table A of the Companies Act Law in Cyprus has not sufficient clauses to cover those provisions especially in cases where there is a new issuance of shares.

Resolution of deadlock situations: Contains mechanisms of resolution of deadlocks in the process of decision making of the Company’s structures. Such examples may be a deadlock which may arise in the General Shareholder’s meeting or a deadlock which may occurs during a Directors meeting.

Restrictions on the activities of the Company: Contains provisions, requiring consent of all Shareholders, or the approval by the specific majority to enter into new areas of business or other territories.

Addition of New Shareholders: Contains provisions for the addition of new parties to the Shareholder’s Agreement. If third parties are to become shareholders, a provision is also included ensuring they would be bound by the existing shareholders agreement.

Business Plan of the Company: Contains provisions for the adoption of a business plan for the Company, stating the obligations of shareholders for additional funding, the nature of the Company or business, financing and any restrictions on loans and the territory of its activities.

The degree of involvement which shareholders retain within the company: Commonly known as the ‘Reserved Matters’ which is found in a Schedule after the terms and conditions of a Shareholders Agreement. Such issues are specified and are decided only by the shareholders voting. Examples of such matters can be the decision on the increase of authorised and issued share capital, appointment and removal of directors, as well as other matters.

Duty of Shareholder to act bona fide: Contains provisions which are either implied or expressed by imposing duties on shareholders to act in good faith when exercising their voting powers.

Dispute Resolution and applicable law: Contains provisions for the reference of disputes to the Courts of a particular country or to arbitration before and under the rules of a reputable institution as well as the choice of the applicable law.

Dividends: Contains provisions with regards to the amount of profits which are to be allocated to the shareholders each year or with the provision of interim dividends.

Non-Competition: Contains provisions preventing shareholders from setting up a competing business to the Company, within an agreed territory or time period.

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, or joint venture.

This service can be provided by Parparinos Milonas Corporate and Legal Consultants and we assure you it will be of the highest available quality. Our dedicated and specialized professionals have the knowledge and experience to assist you.