A shareholders' agreement (sometimes referred to in the U.S.

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 as a stockholders' agreement) is an agreement amongst the shareholder

Shareholder

A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....

s of a company

Company

A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...

.

In strict legal theory, the relationships amongst the shareholders and those between the shareholders and the company are regulated by the constitutional documents

Constitutional documents

In relation to artificial persons, the constitutional documents of the entity are the documents which define the existence of the entity and regulate the structure and control of the entity and its members...

 of the company; however, where there are a relatively small number of shareholders it is quite common in practice for the shareholder to supplement the constitutional document.
There are a number of reasons why the shareholders may wish to supplement (or supersede) the constitutional documents of the company in this way:

• a company's constitutional documents are normally available for public inspection, whereas the terms of a shareholders' agreement, as a private law contract
  Contract
  A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
  
  , are normally confidential between the parties.
• contractual arrangements are generally cheaper and less formal to form, administer, revise or terminate.
• the shareholders might wish to provide for disputes to be resolved by arbitration
  Arbitration clause
  An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process...
  
  , or in the courts of a foreign country
  Forum selection clause
  A forum selection clause in a contract with a conflict of laws element allows the parties to agree that any litigation resulting from that contract will be initiated in a specific forum...
  
   (meaning a country other than the country in which the company is incorporated
  Incorporation (business)
  Incorporation is the forming of a new corporation . The corporation may be a business, a non-profit organisation, sports club, or a government of a new city or town...
  
  ). In some countries, corporate law does not permit such dispute resolution clauses to be included in the constitutional documents.
• greater flexibility; the shareholders may anticipate that the company's business requires regular changes to their arrangements, and it may be unwieldy to repeatedly amend the corporate constitution.
• corporate law in the relevant company may not provide sufficient protection for minority shareholders, who may seek to better protect their position by using a shareholders' agreement
• to provide mechanisms for removing minority shareholders which preserve the company as a going concern
  Going concern
  A going concern is a business that functions without the threat of liquidation for the foreseeable future, usually regarded as at least within 12 months.-Definition of the 'going concern' concept:...
  
  .

Risks

There are also certain risks which can be associated with putting a shareholders' agreement in place in some countries.

• In some countries, using a shareholders' agreement can constitute a partnership
  Partnership
  A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
  
  , which can have unintended tax
  Tax
  To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
  
   consequences, or result in liability attaching to shareholders in the event of a bankruptcy.
• Where the shareholders' agreement is inconsistent with the constitutional documents, the efficacy of the parties' intended arrangement can be undermined.
• Countries with notarial formalities, where notarial fees are set by the value of the subject matter, parties can find that their agreement is subject to prohibitively high notarial costs, which, if they fail to pay, would result in the agreement being unenforceable
  Unenforceable
  An unenforceable contract or transaction is one that is valid, but which the court will not enforce. Unenforceable is usually used in contradistinction to void and voidable...
  
  .
• In certain circumstances, a shareholders' agreement can be put forward as evidence of a conspiracy and/or monopolistic practices
  Monopoly
  A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
  
  .

Common characteristics

Shareholders' agreements obviously vary enormously between different countries and different commercial fields. However, in a characteristic joint venture or business start-up, a shareholders' agreement would normally be expected to regulate the following matters:

• regulating the ownership and voting rights of the share
  Stock
  The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
  
  s in the company, including
  • Lock-down provisions
  • restrictions on transferring shares, or granting security interest
    Security interest
    A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
    
    s over shares
  • pre-emption rights
    Pre-emption right
    A pre-emption right is a right to acquire certain property in preference to any other person. It comes from the Latin verb emo, emere, emi, emptum, to buy or purchase, plus the inseparable preposition pre, before. It usually refers to property newly coming into existence...
    
     and rights of first refusal
    Right of first refusal
    Right of first refusal is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party...
    
     in relation to any shares issued by the company (often called a buy-sell agreement
    Buy-sell agreement
    A buy–sell agreement, also known as a buyout agreement, is a binding agreement between co-owners of a business that governs what happens if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business. It may be thought of as a sort of premarital agreement between...
    
    )
  • "tag-along
    Tag-along right
    A tag-along right is a legal concept in corporate law. The right assures that if the majority shareholder sells his stake, minority holders have the right to join the deal and sell their stake at the same terms and conditions as would apply to the majority shareholder. This right protects minority...
    
    " and "drag-along
    Drag-along right
    Drag-Along Right is a legal concept in corporate law. The right assures that if the majority shareholder sells his stake, minority holders are forced to join the deal. This right protects majority shareholders. Drag-along rights are fairly standard terms in a stock purchase agreement...
    
    " rights
  • minority protection provisions

• control and management of the company, which may include
  • power for certain shareholders to designate individual for election to the board of directors
    Board of directors
    A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
    
    
  • imposing super-majority voting requirements for "reserved matters" which are of key importance to the parties
  • imposing requirements to provide shareholders with accounts or other information that they might not otherwise be entitled to by law

• making provision for the resolution of any future disputes between shareholders, including
  • deadlock provision
    Deadlock provision
    A deadlock provision, or deadlock resolution clause, is a contractual clause or series of clauses in a shareholders' agreement or other form of joint venture agreement which determines how disagreements on key issues are to be resolved in relation to the management of the enterprise.Deadlock...
    
    s
  • dispute resolution
    Dispute resolution
    Dispute resolution is the process of resolving disputes between parties.-Methods:Methods of dispute resolution include:* lawsuits * arbitration* collaborative law* mediation* conciliation* many types of negotiation* facilitation...
    
     provisions

In addition, shareholders agreements will often make provision for the following:

• the nature and amount of initial contribution (whether capital contribution or other) to the company
• the proposed nature of the business
• how any future capital contributions are to be made
• the governing law
  Choice of law clause
  A choice of law clause or proper law clause is a term of a contract in which the parties specify that any dispute arising under the contract shall be determined in accordance with the law of a particular jurisdiction.-Explanation:...
  
   of the shareholders' agreement
• ethical practices or environmental practices
• allocation of key roles or responsibilities

Registration

In most countries, registration of a shareholders' agreement is not required for it to be effective. Indeed, it is the perceived greater flexibility of contract law

Contract

A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

 over corporate law

Corporations law

Companies law is the field of law concerning companies and other business organizations. This includes corporations, partnerships and other associations which usually carry on some form of economic or charitable activity. The most prominent kind of company, usually referred to as a "corporation",...

 that provides much of the raison d'être for shareholders' agreements.

This flexibility, however, can give rise to conflicts between a shareholders' agreement and the constitutional documents of a company. Although laws differ across countries, in general most conflicts are resolved as follows:

• as against outside parties, only the constitutional documents regulate the company's powers and proceedings.
• as between the company and its shareholders, a breach of the shareholders' agreement which does not breach the constitutional documents will still be a valid corporate act, but it may sound in damages against the party who breaches the agreement.
• as between the company and its shareholders, a breach of the constitutional documents which does not breach the shareholders' agreement will nonetheless usually be an invalid corporate act.
• characteristically, courts will not grant an injunction
  Injunction
  An injunction is an equitable remedy in the form of a court order that requires a party to do or refrain from doing certain acts. A party that fails to comply with an injunction faces criminal or civil penalties and may have to pay damages or accept sanctions...
  
   or award specific performance
  Specific performance
  Specific performance is an order of a court which requires a party to perform a specific act, usually what is stated in a contract. It is an alternative to award/ for awarding damages, and is classed as an equitable remedy commonly used in the form of injunctive relief concerning confidential...
  
  in relation to a shareholders' agreement where to do so would be inconsistent with the company's constitutional documents.