Dung Le & Tran Viet Dung
A Shareholders’ Agreement (SHA) is an arrangement among shareholders that describes how a company should be operated and outlines shareholders’ rights and obligations. The Agreement also includes information on the management of the company and privileges and protection of shareholders.
The purpose of a SHA is to form a written proof for the investors that they have invested in the capital of the company on the terms mentioned in the agreement. When there is any dispute between the shareholder and the management of the company, the terms mentioned or agreed upon in the SHA will be checked and considered to resolve the dispute.
It is worth noting that not every company has SHA, as this agreement is not a compulsory under the laws. Hence, SHA is a very important document from the perspective of the shareholders or investors of the company who had invested in the shares of the company and provide funds to the company to manage the operations of the company and expand their business for the sake of capital appreciation as when the company earns more the value of a share in the market also rises.
Shareholder Agreement vs. Charter
SHA differss from company’s Charter. Charter is often considered as by-laws at any company which form the legal backbone of the company’s management structure and govern company’s operations. Every company must have a Charter as required by the laws, meanwhile, a SHA is optional. The SHA is drafted and executed by and for shareholders only, outlining certain rights and obligations, such as the number of shares issued, the fair price of the shares, the decision-making process, reserved matters and restrictions on share transfers, among others.
It can be most helpful when a corporation has a small number of active shareholders. As a matter of fact, the Enterprises Law does not regulate the SHA at all, thus, the rights and obligations set under a SHA will be subject to the rules and principles of contract law.
Shareholders Agreement vs. Joint Venture Agreement
Some may view that Shareholders Agreement also differs from Joint Venture Agreement (JVA), although they have many similar characteristics.
A JVA outlines the essential terms of the overall relationship between the JV partners and deals comprehensively with principal matters such as the scope and purpose of the joint venture, the ownership structure, management and governance of the joint venture and allocation of risks and rewards among the joint venture partners. In other words, the JVA governs the parties’ relationship, and their objectives. Joint ventures may be incorporated, or unincorporated subject to parties’ intention of cooperation. A SHA, meanwhile, is the agreement between and among the shareholders (co-owner) of a corporation that describes how the company operates and outlines the shareholders’ rights and obligations.
The key difference between JVA and SHA are as follows:
Structure. A SHA sets out the terms between several members (e.g. the shareholders) of the same company, while a JVA provides for terms entered into by several members of different companies.
Content. A SHA contains primarily provisions related the owners’ rights and obligations in the company and related management issues of the company, while a JVA goes above that and provides for know-how and resources to be exchanged between owners of different companies.
Key issues of a Shareholders’ Agreement
Below are some key issues that one upon reviewing, negotiating a SHA needs to pay attention.
1. Protection against dilution
Make sure you understand the company’s plans for issuing shares in the future, and have these set out in the shareholders agreement. If possible, try to introduce caps or other restrictions on the company’s ability to issue shares without shareholder approval.
It’s unlikely that you will be able to negotiate a blanket prohibition on issuing shares. However, you might be able to negotiate:
- a right to participate in future fundraising rounds before shares are offered to others;
- a requirement that the Board obtain shareholder approval before issuing shares outside certain defined parameters (for example, it might need approval to issue shares below a certain price, or to issue more shares than an agreed limit); and/or
- a right to have your stake ‘topped up’ if future shares are issued below a certain value.
2. The right to appoint as a member of Management Board
You won’t have a right to be (or appoint) a member of Management Board (MB) of the company unless you specifically negotiate one.
Whether it’s appropriate for you to have such a right will depend on the proportionate size and value of your holding. It’s unusual for shareholders to be able to appoint a MB’s member unless they hold at least 10% of the company’s shares. The minimum threshold is usually higher.
Being a MB’s member will give you greater access to information as well as the ability to influence the company’s decisions.
3. Rights to access information
Particularly if you will not be a MB’s member, your rights to receive company information will be relatively limited. If you require any regular reports from the company, or if you wish to be made aware of specific events, this should be reflected in the shareholders agreement.
4. Tag-along rights
Typically, people invest in private companies based on their confidence in the existing management team. Consistent with this, minority investors will often seek protections against key personnel leaving the company.
Provision on ‘tag along’ in shareholder agreement will give a shareholder to require their shares bought out by new investor(s) if the founding shareholder(s) withdraws from the company or reduces their involvement.
5. Drag-along rights
Sometimes the investor wishes to acquire the shares beyond the amount of share-owned by the majority shareholder(s), the drag-along will enable the majority shareholder(s) to force the a minority shareholder to join in the deal. However, in such situation, the minority shareholder(s) must be offered the same terms and conditions as to the majority shareholder(s) under the transaction.
6. Pre-emptive rights
Pre-emptive rights give the shareholders the right to buy another person’s shares before they are sold to someone else.
Pre-emptive rights effectively place limits on who can be involved in the company. They allow the existing shareholders to restrict ownership to themselves if that is what they wish to do. They can also allow the existing shareholders to prevent a particular person (or types of people) from being shareholders.
7. Limits on the Board’s control
A shareholders’ agreement will usually prescribe limits on what the MB’s members can do without shareholder approval at the General Shareholder Meeting. In addition, the agreement might specify that certain types of approval are required for certain types of decision, the most common levels of approval being:
- Simple majority of shareholders (50%);
- Special resolution (75%, with the resolution passed according to the procedural requirements); and
- Some other proportion of shareholders determined by reference to the make-up of the share register.
The shareholders agreement might also give a shareholder or shareholders a right of veto over certain decisions.
8. Reserved matters or consent rights
Reserved matters or consent rights are a bunch of contractually-agreed matters in a shareholders’ agreement which require consent of any shareholder(s) or all shareholder(s) of the company before being approved and implemented. The matter regulated under the reserved matters/consent rights provision cannot be implemented unless the respective shareholder(s) agree, even if the majority partner has sufficient shareholding to approve them. These matters generally protect the rights of the minority shareholders.