Shareholders’ Agreement: Benefits and Drawbacks

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Introduction

Many legal documents are used to regulate the relations between different parties and define the rules and standards according to which every decision and action should be made or taken. An agreement is one of the possible usually legally approved arrangements that may be developed between different parties during a negotiation process. Many types of agreements are developed worldwide, and each document has its power and impact on people and countries. The same agreement may have different power in different countries. Therefore, people have to learn the legal basics to understand what kind of agreement is enforceable in their countries and know they can use their rights. Agreements may be of different types such as sponsored, affiliation, services, or collaborative.

In this paper, the peculiar features of a shareholders’ agreement will be discussed to comprehend its advantages and disadvantages, explain the conditions under which the chosen agreement is appropriate, and evaluate its worth in the UAE and other countries. A shareholders’ agreement is considered to be a good chance to control the relations between different people or companies that are involved in the same affair and should comprehend their responsibilities as well as respect each other’s rights and opportunities.

The essence of a Shareholders’ Agreement

A shareholders’ agreement is a document within the frames of which the arrangements between stakeholders of a particular company are distinguished and identified in the articles of association (Mantysaari 146). Two types of relations may be discussed in terms of a shareholders’ agreement: the relationships between different shareholders of a company and the relations between shareholders and a company.

The supporters of shareholders’ agreements aim at protecting the investments of shareholders and defining the quality of the relations that may be developed between the company and its shareholders. Even though shareholders play an important role in the life of any company and usually participate in the financial discussions of the company, their duties, and abilities, as well as their interferences with management, remains to be unclear or even limited in many organizations (Bruno and Ruggiero 6). Therefore, they need certain guarantees and clarifications of what they can do concerning the company and how crucial their suggestions or decisions can be.

The creation of a shareholders’ agreement is a chance to prove that the company does not have any hide intentions in regards to its shareholders and investors. Such aspects as the power of votes and liabilities are usually discussed in a shareholders’ agreement. However, even though in many countries, a shareholders’ agreement is governed by the principles of contract law (Mantysaari 146), this document may be improved or adjusted in regards to the corporate values and standards of the company. A stakeholder may perform the functions of one of the members of a board of directors in case this possibility is discussed in the shareholders’ agreement.

A properly developed shareholders’ agreement may also be used as a regulator of all inflows of the company, the profits gained and distributed by the company and any other financial decisions that can be made by different representatives of the company. It is not enough to sign a shareholders’ agreement and learn its conditions. It is more important to understand all characteristics of such a document and use the possibilities that are identified. Besides, in some countries, it is possible to supplement or supersede some terms of the agreement regarding the constitutional rights of citizens.

Conditions under Which a Shareholders’ Agreement is Signed

There are many reasons why people want to sign a shareholders’ agreement and why any organization finds it rational and justified to have such agreements. One of the main grounds that is used to create a shareholders’ agreement is the necessity to clarify the relations between shareholders and the company they make investments in. As a rule, this agreement is not of public concern and can be rather flexible regarding the intentions of the shareholders.

People find it necessary to create a shareholders’ agreement to be provided with the opportunities to manipulate some activities of the company (Bollefer and Bernstein 1). The company may want to offer a shareholders’ agreement as a chance to get loans from different shareholders and set the repayment conditions following its possibilities. Besides, shareholders may be major and minor, and the shareholders’ agreement helps to protect the rights of minority shareholders.

A minority shareholder is a person or even an organization that has some small part of the company (less than a half). Therefore, during various discussions and meetings, such shareholders’ votes are not considerable, and people fail to protect their ideas and suggestions. The shareholders’ agreement identifies the rights of minority shareholders and helps them to understand what they may expect from the cooperation with a chosen company.

As soon as the signatures are placed on the agreement, all shareholders and the employees of a company are aware of how their relations have to be developed. Singleton identifies other situations in which shareholders’ agreements can become the best option to stabilize the relations between the parties (4). For example, she introduces the situation when two or more people go into business together as shareholders with different liabilities and want to learn their opportunities, or when there is one family that holds shares and wants to formalize their relations (Singleton 4). Anyway, all situations in which shareholders’ agreements are required are connected with the fact that people need guarantees and clarifications of their relationships in a company.

Main Characteristics of a Shareholders’ Agreement

As soon as the reasons for why companies need shareholders’ agreements are identified, it is necessary to explain the main characteristics of such a document and get to know what aspects are usually covered in it. The circumstances under which shareholders’ agreements may be developed vary considerably. The forms of shareholders’ agreements may vary as well. Still, the main goal of this kind of agreement is to protect its parties against the wrong use of voting power. Many other characteristics have to be considered. For example, the regulation of votes can be organized in the following way:

All shares can be restricted and transferred under certain conditions;
A refusal right (or veto) provides the parties of the agreement with the possibility to refuse an idea that may contradict the terms of the agreement (Slorach and Ellis 309);
Minority shareholders are protected.

In addition to the voting regulations, several rights can be defined under the shareholders’ agreement:

The identification of the rights the parties have when they decide to sell and distribute their shares;
The recognition of the duties the company and its employees have in their relations with shareholders;
The clarification of the options that are available to people, who want to buy shares;
The classification of the duties that have to be performed by the board of directors in a company;
The development of the steps that have to be taken in cases of emergencies or unpredicted situations that are out of control of a company and its shareholders;
The calculations of the initial contributions that have to be made to the company;
The explanation of ethical issues and environmental concerns that may influence shareholders and a company.

Each company is free to introduce its articles for consideration in a shareholders’ agreement. It is hard to predict the worth of such a document and its necessity in the company. Therefore, there is no certain example that has to be followed by all organizations in all countries. Still, there are examples of terms that may be included in the shareholders’ agreement (The Shareholders Agreement – A Sample Agreement):

The identification of an issued capital;
The definition of the terms that can be used in the document;
The explanation of the agreement’s terms that can be used;
The description of the affairs of the company and the members of the board of directors, who will be mentioned in the agreement;
The evaluation and identification of the rights that can be used during the first refusal;
The clarifications of tag-along and drag-along clauses under which the parties of the agreement can sell their shares at the same prices shareholders can sell them (Slee 449);
Shares’ explanations and details;
Restriction details;
Management details and directors’ obligations;
General terms;
Terminations;
Information about the parties.

To make a shareholders’ agreement legal, all parties have to put their signatures.

Registration Details

The majority of shareholders’ agreements should not be registered to be an effective means of rights’ regulation. Besides, shareholders’ agreements are flexible and private that makes them difficult to change and easy to enforce (Ma 18). Unfortunately, such flexibility may lead to conflicts between shareholders and companies that are the parties of the agreement. Therefore, if the rights of one party are diminished or neglected, each case has to be investigated thoroughly in regards to the existing constitutional rights of a country (Duffy 20).

Advantages of a Shareholders’ Agreement

One of the main advantages of a shareholders’ agreement is the possibility to regulate the relations between shareholders and the company’s representatives. Such agreements help to identify and support the rights of shareholders in the companies they are going to make some investments. Also, there are many shareholders, who join the companies with the already established rules, values, and goals. The shareholders’ agreement provides shareholders with the required portion of the information about the rights and standards of the company.

As it has been stated before, minority shareholders gain several advantages with shareholders’ agreements. In addition to the extra rights that are properly identified in the agreement and the information that is related to the company, minority shareholders may become the members of the board of directors with time or introduce some new share issues that may be considered by all parties. Finally, with the help of tag-along rights, minority shareholders can purchase the shares sold by another shareholder at the price set for purchase without any additional payments or requirements (Bollefer and Bernstein 22). Such protection of the rights is advantageous indeed.

There are also several benefits for the majority shareholders, who have a considerable amount of shares in the company. The flexibility of the agreement is a significant aspect of the shareholders’ agreement because it provides shareholders with a chance to meet some new goals and concerns of a particular party. The drag along clause underlines the possibility for a majority shareholder to buy shares from different shareholders and set the prices that are affordable for all parties of the agreement.

In general, investors and all parties of the shareholders’ agreement, who are interested in the options they get, can find the answers in such kind of document and be provided with such guarantees as privacy, dispute resolution, and extensions of the agreement periods. Confidentiality is also an urgent aspect of a shareholders’ agreement. Though the detailed information about the parties is given in the agreement, this kind of document is not public and remains to be available only to the parties of the agreement.

Finally, shareholders’ agreements help to regulate such aspects as the structure of the company and the roles of each employee, the possibility to appoint or remove directors or other participants, who do not meet the standards of the company, and the restrictions that have to be considered when the company undergoes particular (inevitable) changes.

Disadvantages of a Shareholders’ Agreement

The researchers fail to find some serious disadvantages of a shareholders’ agreement because all its points are discussed by all parties and all clarifications are usually given before the enforcement of the document (Bruno and Ruggiero 249; Slorach and Ellis 308). Still, sometimes, the idea that all parties undergo a kind of binding effect cannot be regarded as a positive outcome of the agreement. Parties want to save their independence and avoid the necessity to discuss all solutions together. In other words, individuality is lost in a shareholders’ agreement.

Shareholders’ Agreements in the UAE

Shareholders’ agreements are important documents in the United Arab Emirates. Under Federal Law No. 8, the presence of shareholders’ agreements is a long-standing requirement that cannot be neglected. As a rule, UAE companies should have at least one national shareholder, and a shareholders’ agreement is the way to protect the rights of minority shareholders and introduce their interests to foreign and regional investors. There are no certain formal requirements that have to be discussed by the parties of a shareholders’ agreement of the UAE. Such agreements may be concluded in a written form or an oral form. Sometimes, it is possible to discuss the terms and “sign” an agreement by phone.

Another peculiarity of the UAE agreements is the possibility to execute side agreements in terms of the already existing shareholders’ agreements. There are situations when some limited liabilities companies are under the control of foreign investors (shareholders). The representatives of such organizations want to clarify the managerial peculiarities that can be applied to their companies. In such situations, side agreements help to describe provisions that may contradict to the regional laws and introduce new conditions under which investments or loans can be offered. A side agreement promotes the possibility of a broader trade treaty in business relations.

Such practices are enforceable in the UAE because they help to protect the interests of foreign investors and provide them with guarantees that they may control the company. Sometimes, side agreements are defined as illegal in case the situations are discussed in the UAE courts. However, there is always a lack of judgment to support the chosen position. As a result, the majority of the UAE courts support the validity of side agreements. Therefore, the companies that conclude side agreements try to solve problems and disagreements within their companies. Despite the complex nature of side agreements, they remain to be a part of the UAE business as well as shareholders’ agreements.

Shareholders’ Agreements in Different Countries

There are many developing countries where a shareholders’ agreement is practiced. Companies want to be invested by regional and international shareholders and stay protected with their rights and freedoms at the same time. Still, each country has its form of control under which shareholders’ agreements can be signed. If the UAE companies should follow the Federal Law and the Companies Law, the representatives of the Romanian business are governed by the Foreign Law.

In Indonesia, a shareholders’ agreement is also called a contract that has to correspond with the corporate constitution. Canadian organizations should be organized following the Canadian Business Corporations Act that identifies the main characteristics of the corporate culture. Each country is free to have its freedoms and preferences and be a unique representative of its traditions. Almost the same happens to the agreements that are concluded in the countries. The UAE remains to be the country with one of the most modern and innovative approaches to management and business. The UAE companies demonstrate a good example of how it is possible to achieve success and follow the traditions that cannot be broken or neglected. At the same time, respect and dignity are two crucial factors of each business relation.

Conclusion

In general, a shareholders’ agreement is a crucial document in business relations that are developed between companies and shareholders. People have several ideas that have to be invested properly. The necessity to deal with investors and attract the attention of shareholders promotes the necessity to conclude the agreements that can protect the rights of all parties and do not change the essence of such relations. In terms of shareholders’ agreements, it is possible to regulate the relations, identify the rights of people, and place the restrictions on different changes that may take place in a working process.

It is not an easy task to develop professional and fair relations with unknown people or, vice versa, to create formal relations with family members and does not destroy the already developed relations. Any shareholders’ agreement has its benefits and drawbacks, and each party has to learn all of them to understand what they can do with such arrangements, if they may achieve the goals set, and if the agreement may cover all losses or misunderstandings.

Works Cited

Bollefer, Stuart, F. and Jack Bernstein. Shareholders’ Agreements: A Tax and Legal Guide. Toronto, Ontario: CCH Canadian Limited, 2009. Print.

Bruno, Sabrina and Eugenio Ruggiero. Public Companies and the Role of Shareholders: National Models towards Global Integration. Frederick, MD: Aspen Publishers, 2011. Print.

Duffy, Michael, J. Shareholders Agreements and Shareholders’ Remedies Contract Versus Statute? Bond Law Review 20. 2 (2008): 1-27. Web.

Ma, Fang. Law Express Question and Answer: Company Law (Q&A Revision Guide). Harlow, UK: Pearson, 2014. Print.

Mantysaari, Petri. Comparative Corporate Governance: Shareholders as a Rule-Maker. New York, NY: Springer, 2005. Print.

Singleton, Susan. Joint Ventures and Shareholders’ Agreements. West Sussex: Bloomsbury Professional Ltd. Web.

Slee, Robert, T. Private Capital Market: Valuation, Capitalization, and Transfer of Private Business Interests. Hoboken, NJ: John Wiley & Sons, 2011. Print.

Slorach, J. Scott and Jason G. Ellis. Business Law 2014-2015. Oxford, UK: Oxford University Press, 2014. Print.

The Shareholders Agreement – A Sample Agreement. n.d. Web.

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