Shareholders’ agreements generally play an important role in the regulation of the way a company is set up, operated, managed and run. A shareholders’ agreement is an agreement between the shareholders which generally sets out the shareholders’ rights, privileges and obligations.
Generally, a shareholders’ agreement aims to deal with disputes or unexpected events arising from the relationship between the shareholders themselves as well as between them and the management of the company. Having a shareholders’ agreement helps in means minimizing any issues which may arise in the future between the shareholders and the management of the company and ensuring a more solid relationship between the shareholders.
What is a shareholders’ agreement?
As a contract, shareholders’ agreement creates contractual obligations as well as legal obligations for all parties involved to comply with its terms. It is also a confidential document and its terms cannot be altered without the consent of the parties/shareholders involved. Regularly and with a specific provision in the agreement, in case of conflict between the terms of the shareholders' agreement and the company's articles of association, the provisions of the shareholders’ agreement shall prevail. It is worth mentioning that, in the event of a breach of the shareholders’ agreement, shareholders can proceed with the filing of a claim for damages.
Key functions of a shareholders’ agreement
Disputes between shareholders themselves and between them and the directors can be resolved through a shareholders’ agreement, which may contain terms for mediation or arbitration. These disputes may concern generally the operation of the company and specifically the salaries, the dividends, admitting new shareholders, number and choice of directors as well as the selling of the shares and company.
Decision making
As a general rule, Cyprus company law gives the upper hand to the majority shareholder(s) as decisions can typically be made with the positive vote of a simple majority (i.e. 51%) and in certain cases by three fourth majority.
However, in drafting a shareholders’ agreement, the shareholders can decide what percentage is required for certain decisions. For instance, fundamental decisions relating directly to the business and financing may require a unanimous decision by all of the shareholders. The shareholders’ agreement may provide that, certain important decisions will be taken with the agreement of all shareholders, regardless the size of their holding and it may therefore regulate their voting rights. More specifically, a minority shareholder may have more power in decision-making and therefore his vote may carry more weight. In particular, the voting power of shareholders does not depend on the number or class of shareholders held by each shareholder. These important decisions may include, inter alia, the issue of new shares, the appointment or removal of directors, the transfer of assets into or out of the company, bonuses and change of the nature or scope of the company.
Transfer and Ownership of Shares
The shareholders’ agreement may include provisions regarding the selling of the shares of a shareholder and more specifically to whom a shareholder may sell his shares when he decides to leave the company as well as the price at which the shares will be sold. A shareholder may sell his shares to another shareholder and if there is a refusal for their buying, the shares can be offered to the company. If a shareholder dies, then the other shareholders may purchase his shares at a market value or they may agree that their personal representatives may sell the shares of the deceased.
The shareholder’s agreement contributes to the interconnection of the shareholding and the employment. Such agreement may provide that, where a director or employee who holds shares in the company, has left the company in amicable circumstances, he can sell his shares at a price which is determined by reference to the values of the company. On the other hand, where a director or employee who holds shares in the company, has been dismissed for serious misconduct, he can take only a nominal sum of his shares.
When a shareholder decides to leave the company, the shareholders agreement may restrict him to setting up a competing company, provide any service that conflicts with the interest of the company, or disclose any confidential information of the company.
Financing
The shareholders’ agreement may also include provisions concerning dividends. More specifically, it may contain clauses as to the percentage of the dividend to be paid if the profits allow or different level to be paid to each shareholder for different classes or shares as well as whether the dividend may not be paid.
Administrative and regulatory matters can likewise be regulated with a shareholders’ agreement. These matters may concern the identity of auditors and bankers, location of the registered office and the accounting reference date, i.e. the end of a limited company’s financial year which normally spends a period of 12 months, the change of which requires the consent of the shareholders.
The shareholders’ agreement may contain valuation clauses which enter into force when there is to be a buyout of shares. This happens when a shareholders wish to exit he company or had died and the remaining shareholders have the right or obligation to buy the shares out.
Conclusion
In the light of the above, there are no limits on the matters and topics which can be addressed in a shareholders’ agreement as it may cover a wide range of issues related to the operation of the company. A shareholders’ agreement certainly contributes to the better management of the various corporate issues and the general administration of the company, while at the same time it governs the relationship between the shareholders in order to protect the interests of the individual shareholders as and against each other.