A shareholders' agreement (sometimes referred to in the U.S. as a stockholders' agreement) (SHA) is an enforceable agreement amongst the shareholders or members of a company. In practical effect, it is analogous to a partnership agreement. There are advantages of the shareholder's agreement: they provide a contractual remedy if their terms are broken,[1] and they can help the corporate entity to maintain the absence of publicity and maintain confidentiality. Nonetheless, there are also some disadvantages that should be considered, such as the limited effect to the third parties (especially assignees and share purchasers) and that alteration of the terms of an agreement can be time consuming.
In strict legal theory, the relationships amongst the shareholders and those between the shareholders and the company are regulated by the constitutional documents of the company.[citation needed] However, where there are a relatively small number of shareholders, like in a startup company, it is quite common in practice for the shareholders 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:
There are also certain risks which can be associated with putting a shareholders' agreement in place in some countries.
Shareholders' agreements vary enormously between different countries and different commercial fields. However, in a characteristic joint venture or business startup, a shareholders' agreement would normally be expected to regulate the following matters:
In addition, shareholders' agreements will often make provision for the following:
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 over corporate law 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: