A Brief Guide to Shareholders’ Agreements

A shareholders’ agreement is a private agreement between shareholders which determines the manner in which shareholders exercise their rights with respect to the shares in the company or the rights attached to the shares in the company.

The law governing companies incorporated in Cyprus is the Companies Law Cap 113 (the “Companies Law”), which covers a vast amount of territory, including how companies must be formed, operated and kept in proper order. Anyone who buys shares in a company will, in the absence of a shareholders’ agreement, purchase them subject to the relevant law. This has the effect of creating a binding, ‘statutory’ contract between the shareholders. This statutory contract is more formally known as the “Articles of Association” which give detailed instructions on how the company will operate.

Although many of the provisions often contained in a shareholders’ agreement could equally have been inserted into the articles of association there are various, good reasons for preferring to create a shareholders’ agreement, including:

1. Confidentiality/Public Disclosure

Unlike the articles of association, a shareholders’ agreement is not usually open for public inspection and this can be a distinct advantage where there is a desire to keep matters confidential. Where changes are made to the articles of association, copies of the amended documents must be sent to the Registrar of Companies, where they become matters of public record.

2. Changes of shareholders/parties

New shareholders of a company are automatically bound by the statutory contract formed by the articles of association. The same is not true in relation to a shareholders’ agreement and it is usual to provide that any new shareholder must enter into a similar agreement with the remaining parties or (more commonly) enter into a deed of adherence agreeing to be bound by the terms of the existing shareholders’ agreement.

3. Alterability

A distinct advantage of a shareholders’ agreement is that, unless the agreement provides otherwise, it will only be capable of being amended with the agreement of all parties. Usually, it is provided that written consent must be given. The rules governing alterations of the articles of association are more complex. The general principle is that a company may amend its articles by way of special resolution requiring a majority of at least 75% of the votes cast as set out in s.12 of the Companies Law.

4. Duration

A shareholders’ agreement can be brought into effect by the shareholders and then terminated at any time. However, a company must always have a set of articles of association so long as it remains in existence. This sometimes gives the shareholders’ agreement a greater degree of flexibility.

There is no doubt that a shareholders’ agreement has numerous advantages, but there are a few disadvantages to having such a contract in place, these are as follows:

1. Enforceability in case of breach

In theory, articles of association confer more certain protection, in that acts carried out in breach of the articles or without the authority required under the articles may be void, even where third parties are involved. In contrast, faced with an imminent breach of a shareholder agreement, the aggrieved party may have to seek an injunction urgently, with no assurance that it will be granted and the prospect of having to give a cross-undertaking in damages. It may be too late. Even if the aggrieved party ultimately obtains judgment, the court might award damages rather than specific performance.

2. Parties

Where there are a large number of shareholders, it may be impractical to try to regulate the company’s operations and the shareholders’ rights and obligations by way of a shareholders’ agreement. In those circumstances it may be preferable to build any required provisions into the articles of association.

In summary, a shareholders’ agreement is a valuable tool in helping to set expectations among business partners and to manage the fall out if irreconcilable differences emerge. In this way they contribute to the development and maintenance of business value. They do not, of course, guarantee business success but they are a valuable investment for the future.

The drafting of a shareholders’ agreement should be carried out by an experienced lawyer who are able to provide proper advice and assistance tailor made to the specific facts of each case. Our legal team at LLPO Law Firm has the knowledge and expertise on drafting high end shareholders’ agreement and is able to provide professional advice and help, on how to best structure any such arrangement between shareholders.