Shareholders' agreement

A shareholders' agreement (sometimes referred to in the U. S. as a stockholders' agreement) (SHA) is an enforceable agreement amongst the shareholders or members of a company. In practical effect, it is analogous to a partnership agreement. There are advantages of the shareholder's agreement: they provide a contractual remedy if their terms are broken, and they can help the corporate entity to maintain the absence of publicity and maintain 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 that alteration of the terms of an agreement can be time consuming.

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.

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.