In the realm of corporate law, shareholders’ agreements serve as crucial documents that delineate the rights, obligations, and relationships among the shareholders of a company. From the practitioner’s standpoint, navigating the intricacies of drafting and negotiating these agreements requires a comprehensive understanding of corporate governance principles, legal frameworks, and the specific dynamics of the entities involved. This article aims to provide a thorough exploration of shareholders’ agreements, shedding light on their significance, key provisions, and the practical considerations that practitioners must address.
Shareholders’ Agreement: What exactly is this?
At its core, a shareholders’ agreement is a legally binding contract entered into by the shareholders of a company, supplementing the corporation’s articles of association or bylaws. Unlike the articles of association, which are publicly available documents filed with the relevant corporate registry, shareholders’ agreements are typically confidential and tailored to the specific needs and circumstances of the shareholders involved. These agreements are common in closely held corporations, startups, joint ventures, and other situations where there is a need to formalize the relationship between shareholders beyond what is prescribed by default corporate law.
Significance and Objective
The primary objective of a shareholders’ agreement is to establish a framework for governance, decision-making, and dispute resolution within the company. By addressing a range of issues not covered in the company’s constitutional documents, shareholders’ agreements help mitigate potential conflicts, protect shareholders’ interests, and provide clarity on important matters such as ownership rights, management structure, transfer of shares, and exit strategies.
Key Provisions of a Shareholders’ Agreement
A well-drafted shareholders’ agreement typically includes provisions covering various aspects of the shareholders’ relationship. While drafting a Shareholders’ Agreement, the provisions of the Articles of Associaton of the Company (as well as the specific provisions of Schedule-1 of the Companies Act, 1994 as mentioned in section 17 of the Companies Act) should be reflected in the draft. It is mentionable that any potential conflict between the articles of association and the shareholders’ agreement may lead to legal complexity.
Some of the key provisions often found in these agreements include:
(1) Introduction and Definitions: The agreement should begin with an introduction that identifies the parties involved and provides definitions for key terms used throughout the document. Clear definitions help avoid ambiguity and ensure mutual understanding among the shareholders.
(2) Share Ownership and Capital Structure: This section outlines the details of the company’s share capital, including the classes of shares, the number of shares held by each shareholder, and any special rights attached to specific classes of shares. It may also specify restrictions on the transfer of shares and procedures for issuing new shares.
(3) Shareholders’ Rights and Obligations: The agreement should delineate the rights and obligations of each shareholder, including voting rights, dividend entitlements, and obligations to contribute additional capital if needed. It may also address matters such as attendance at shareholder meetings and access to corporate information.
(4) Management and Decision-Making: Provisions related to the management and decision-making structure of the company are essential for establishing clear governance mechanisms. This section may cover topics such as the composition of the board of directors, appointment and removal procedures for directors, and decision-making thresholds for significant corporate actions.
(5) Transfer of Shares: Shareholders’ agreements often include provisions governing the transfer of shares to ensure that changes in ownership do not disrupt the company’s operations or jeopardize the interests of existing shareholders. This may include rights of first refusal, pre-emption rights, and restrictions on transfers to third parties.
(6) Exit Strategies and Liquidity Events: Given the importance of exit strategies in corporate transactions, the agreement should address mechanisms for facilitating the orderly transfer of shares in the event of a sale, merger, or dissolution. This may include buy-sell provisions, drag-along and tag-along rights, and procedures for valuing shares.
(7) Confidentiality and Non-Compete: To protect the company’s confidential information and prevent shareholder conflicts, the agreement may include provisions requiring shareholders to maintain confidentiality and refrain from engaging in competing businesses during and after their involvement with the company.
(8) Dispute Resolution: Disputes among shareholders can significantly disrupt business operations if not resolved efficiently. The agreement should establish procedures for resolving disputes, such as mediation, arbitration, or other alternative dispute resolution mechanisms, to minimize the risk of litigation.
(9) Miscellaneous Provisions: Additionally, shareholders’ agreements may include miscellaneous provisions addressing matters such as amendment procedures, governing law, jurisdiction, and severability clauses to ensure the enforceability of the agreement.
Practical Considerations for drafting and negotiating
Drafting and negotiating shareholders’ agreements require a nuanced understanding of both legal principles and the specific dynamics of the parties involved. Practitioners must carefully consider the following practical aspects:
(1) Tailoring to the Company’s Needs: Shareholders’ agreements should be tailored to the unique circumstances and objectives of the company and its shareholders. A one-size-fits-all approach is rarely appropriate, and customization is essential to address the specific concerns and priorities of the parties involved.
(2) Balancing Interests: Negotiating a shareholders’ agreement often involves balancing the competing interests of different shareholders. Practitioners must navigate these negotiations with diplomacy and tact, seeking compromises that protect the collective interests of the shareholders while fostering a constructive working relationship.
(3) Anticipating Future Scenarios: Effective shareholders’ agreements anticipate potential future scenarios and provide mechanisms for addressing them. Whether it’s a change in ownership, management disputes, or liquidity events, the agreement should offer clarity and guidance on how such situations will be handled.
(4) Legal Compliance: Practitioners must ensure that shareholders’ agreements comply with applicable laws (especially the Companies Act, 1994 and the Contract Act, 1872) and regulations governing corporate governance, securities, and contracts. Failure to adhere to legal requirements can render the agreement unenforceable or expose the parties to legal risks and liabilities.
(5) Review and Revision: Shareholders’ agreements are not static documents; they should be periodically reviewed and updated to reflect changes in the business environment, corporate structure, or the interests of the shareholders. Practitioners play a crucial role in advising clients on when and how to amend their agreements to ensure ongoing effectiveness and relevance.
Legal Aspects of Shareholders’ Agreement in Bangladesh
In general, the Shareholders’ Agreements in Bangladesh are governed by the Contract Act, 1872 and the Companies Act, 1994, and have been relied upon by the Courts to settle corporate disputes, e.g. in the case of H.B.M. Iqbal vs. Md. Shirajul Islam and Others (6 ADC (2009) 565).
Furthermore, section 17 of the Companies Act stipulates that the provisions of a number of regulations listed in Schedule 1 of the Act would be considered as part of the Articles of Association, whether they are listed or not. As such, it is only logical that similar provisions may be reflected in the Shareholders’ Agreement, and the provisions of the Shareholders’ Agreement must not contravene the existing laws of Bangladesh.
This might create some practical problems for founders and entrepreneurs in Bangladesh (especially in structuring cross-border investment deals), as some widely practiced corporate elements e.g. Employee Stock Options or Share Warrants for private companies are not (yet) permitted in our Company Law, and therefore, they must not be included in s Bangladeshi Shareholders’ Agreement.
Another important aspect to consider is the situation of a conflicting provision between the Articles and the Shareholders’ Agreement? While the issue is not yet tested in Bangladeshi Courts, the jurisprudence developed by the Supreme Court of India may be regarded as persuasive.
In the 1992 case of VB Rangaraj vs. VB Gopalkrishna, the Supreme Court of India held that shareholders agreement cannot have an upper hand over the Articles of a Company, and hence can’t go beyond the clauses of Articles of Association. The Supreme Court observed that the provisions of a shareholders agreement inflicting restrictions, although is in consonance with the Companies Act, can be authorised only when they are in consonance with the Articles of Association as well.
The aforementioned view was, however, slightly changed in the 2012 case of Vodafone International Holdings BV vs. Union of India, where the Supreme Court of India opined that the shareholders and the company can enter into any agreement as long as they are not in contravention with the Indian Contract Act. Further, it was held that the provisions of the Shareholders agreement that are not included in the Articles of Association can be enforceable if they are not in violation of the Indian Contract Acts. The Court held that “this court (in V.B. Rangaraj) has taken the view that provisions of the Shareholders’ Agreement imposing restrictions, even when consistent with Company legislation, are to be authorized only when they are incorporated in the Articles of Association, (is) a view we do not subscribe. (Therefore,) the shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in the SHA shall not go contrary to the AoA. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company. It can visualize the best interest of the company on diverse issues and can also find different ways not only for the best interest of the shareholders, but also for the company.“
Conclusion
In conclusion, shareholders’ agreements play a vital role in defining the rights, obligations, and relationships among shareholders in a company. From a practitioner’s perspective, drafting and negotiating these agreements require a deep understanding of corporate law principles, as well as careful consideration of the specific needs and dynamics of the parties involved. By addressing key provisions, practical considerations, and the significance of these agreements, practitioners can effectively guide their clients through the process of creating robust and enforceable governance frameworks that support the long-term success of the company and its stakeholders.