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What is a Shareholder’s Agreement?

A Shareholder’s Agreement is distinct from the company’s constitution. Without a Shareholder’s Agreement, the Company would be controlled solely and exclusively by the exercise of shareholding or directorship rights, through its constitution, and the Cyprus Companies Laws, which are generally insufficient, to protect the rights and interests of minority shareholders.

A Shareholder’s Agreement contains the rights and obligations of shareholders of a company, and commonly covers matters, governing the management and structure, initial and continuing funding, as well as the administration and business activities of the Company.

A Shareholder’s Agreement, is a significant and useful document, because it provides a mechanism, for setting out the principles, upon which the shareholders or partners, in a joint venture agree to run their business.

What is covered by a Shareholder’s Agreement?

Usually such an agreement includes provisions regulating the following inter alia matters:

• The Company Structure: Includes the composition of the share capital of the Company.

• The appointment and removal of directors: Includes provisions of the existence of unanimous consent of shareholders, for certain important matters, or the existence of specific majorities for the adoption of certain decisions, restrictions on the powers of the Board of Directors, etc.

• Shareholding restrictions and the transfer of shares: Includes pre-emption rights, provisions prohibiting transfers of shares or interests in shares, except in certain circumstances, the procedure of transfer of shares, and procedures of calculating the fair value for the shares.

• Resolution of deadlock situations: Includes mechanisms of resolution of deadlocks in the decision making process of the Company’s organs (i.e. General Shareholder’s meeting or Board of Directors).

• Addition of New Shareholders: Includes the mechanism for the addition of new parties to the Shareholder’s Agreement.

• Restrictions on the activities of the Company: Includes provisions, requiring consent of all Shareholders, or approval by specific majority to enter into new areas of business or territories.

• Duty of Shareholder to act bona fide: Includes provisions which, either expressly or impliedly, impose duties on shareholders to act in good faith, when exercising their voting powers etc. (i.e. under Cyprus law, the shareholders do not owe, such a duty except in situations where the Company can be characterized as a “quasi partnership”).

• Business Plan of the Company: Includes provisions for the adoption of a business plan for the Company, containing inter alia the obligations of shareholders for additional funding, the nature of the business of the Company, the territory of its activities etc.

• Dividends: Includes the amount of profits to be allocated to shareholders, each year etc.

• Access to records and financial documents: Includes provisions securing the rights of Shareholders to have access on the Company’s records, financial statements etc.

• Non-Competition: Includes provisions preventing shareholders from setting up competing business, to the Company, within a prescribed time period, or territory.

• Confidentiality: Includes provisions relating to the exposure to publicity of the Company’s documents (Under Cyprus Law there is no obligation for the registration or deposit of the Shareholder’s Agreement with the Registrar of Companies).

• Dispute Resolution and applicable law: Includes provisions for the reference of disputes to the Courts of a specific country or to arbitration before and under the rules of a reputable institution (LCIA, ICC, Vienna Center etc.), as well as the choice of the applicable law.

CONCLUSSION

A Shareholder Agreement is a valuable tool, for providing a procedural framework, to regulate and govern the internal management of a company, or joint venture.

In addition, through the use of a Shareholder’s Agreement, the Parties can achieve greater protection, of the rights of minority Shareholders, quick resolution of deadlocks, sufficient regulation of the rights of entry, or exit, of shareholders in the Company, secure methods of valuation of the fair value of the shares of the Company etc. Because the Shareholder’s Agreement, has the additional advantage of not being available to public, unlike the Company’s constitutions, sensitive details, regarding the role of the parties in the Company’s management, their rights and obligations etc., may be set out in the Shareholders Agreement.

The Shareholders Agreement shall be signed by all registered shareholders of the Company, as well as by the Company, and in case of conflict between the terms of the Articles of Association, and the terms of the Shareholders Agreement, the terms of the latter, prevail and have superior effect.

 

 


For further information on this topic please contact Mr. Soteris Pittas at SOTERIS PITTAS & CO LLC, by telephone (+357 25 028460) or by fax (+357 25 028461) or by e-mail (spittas@pittaslegal.com).

 

The statements contained in this publication are not legal opinions and readers should not act on the basis of such statements without first consulting a lawyer.