A shareholders' agreement is essentially a private
contract between the shareholders of a Company which sets out their
rights and obligations towards each other.
A company’s articles of
association cover membership rights (they are ineffective as far as
non-membership rights are concerned) and are open to public inspection.
Therefore, if shareholders want to bind each other (privately) on
matters which are not relevant to membership rights (such as a
restrictions on borrowing; requirements for unanimity on major business
decisions; agreements not to compete or poach employees or customers;
agreements on dividend policy) then they would be advised to have a
shareholders’ agreement in addition to their articles of association.
Many business owners realise the benefits of having a clear
constitution – covering issues such as share valuation, transmission of
shares on death, dividend policy and scope of authority -only too late.
The effects of not having at least considered such issues when starting
up a business can be disastrous. It is far better to have agreed how
situations will be resolved or managed at the outset so that in the
event of dispute the parties will have a clear method of resolving
issues and lessening the detrimental impact on the business.
Whereas most provisions in the articles are amended with the approval
of the shareholders holding 75% or more of the voting rights, a
shareholders’ agreement can only be amended by unanimous agreement of
its parties. Therefore, shareholders’ agreements can be a useful
document to entrench minority protection provisions for the benefit of a
shareholder holding a minority of the shares in the Company. A breach
of a shareholders' agreement would normally entitle the aggrieved
shareholder/the Company to claim damages for breach of contract, whereas
an act or omission contrary to the articles does not give rise to a
breach of contract – but it could mean a particular action, such as the
transfer or allotment of a share, is invalid or ineffective.
Conflicting provisions between shareholders’ agreements and articles
(particularly regarding provisions as to how shares are valued and what
rights attach to the shares issued) can lead to messy disputes so it is
important that both are reviewed to ensure that they are consistent with