A Shareholders’ agreement (SHA) is a private contract between the members of the company containing, amongst others, the rules for running and owning the company. A SHA regulates that relationship as well as setting the grounds in the event of a deadlock. It is important for the shareholders to enter into a SHA before, or upon, the incorporation of the company in order to be aware of their rights and obligations towards each other. SHA acts as a safeguard and gives more protection and comfort to the Shareholders.
SHA will usually deal with indicating respective ownership of shares and with levels of shareholders’/directors’ authority for making decisions of the company such as when the business and assets of the company can be sold. There is no standard form of SHA under Cyprus Law, and normal rules of contract law apply, so it is flexible to fit your needs.
SHAs are closely related to the company’s Articles of Association. All companies produce and execute Articles of Association (AoA), a form of statutory contract, provided for under the Companies Law, CAP 113 as amended from time to time, however companies are not legally required to have a SHA. AoA are filed with the Registrar of Companies when the company is incorporated and they set out the administrative and company law procedures for carrying out the business affairs of a company. Importantly they should set out the classes of shares and the rights attached thereon, such as the right to vote, dividend entitlements and return of capital on a winding up of the company. As under common law principles AoA always prevail over a SHA in case of conflict between the two documents, it is advisable that all the provisions included in a SHA are transposed into the AoA of the Company, as well, by conforming the provisions of the AoA to the provisions of the SHA. This would also avoid triggering the requirement that any document amending or purporting to amend the AoA becomes a registrable document and should be filed with the Registrar of Companies, hence protecting the confidential nature of the SHA itself. Where the parties choose for laws other than the laws of Cyprus to be the governing law of the SHA, the draftsman should take great care to make sure that the provisions of the SHA are not materially inconsistent with mandatory provisions of Cyprus law and hence advice from local lawyer should always be sought out.
Our experience has shown that a fully-fledged SHA would contain at least provisions which:
- Set out the shareholders’ rights and obligations;
- Regulate the issuance, transfer and sale of shares of the company;
- Regulate the appointment and resignation/removal of Directors;
- Set out provisions to resolve deadlock situations;
- Set out the matters reserved for the shareholders to decide;
- Regulate the amount and way of declaring dividends; and
- Clarify dispute resolution procedures.
In the light of the above you will appreciate that in certain circumstances a SHA is a useful tool which provides a procedural framework for the internal management of the company and determines the cases where the decisions have to be taken by the directors or shareholders.
The drafting of such agreement should be carried out by our experienced lawyers who are able to provide proper advice and assistance tailor made to the specific facts of each case.