A shareholder agreement is a contract between the shareholders of a company. Without a shareholders agreement, the relationships among  shareholders are regulated by the constitution of the company. Every company has a constitution. Not all companies have a shareholders agreement.

The shareholder agreement works together with the constitution. Shareholders sometimes update or amend the constitution of the company when adopting a shareholders agreement.  A shareholders’ agreement is confidential between the parties.

The constitution of a company may not provide sufficient protection for minority shareholders. Minority shareholders can protect their position by using a shareholders’ agreement.

Shareholders’ agreements vary enormously. In a characteristic joint venture or business start-up, a shareholders’ agreement would normally be expected to cover the following matters:

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

regulating the ownership and voting rights of the shares in the company, including

restrictions on transferring shares, or granting security interests over shares

pre-emption rights and rights of first refusal in relation to any shares issued by the company (often called a buy-sell agreement)

“tag-along” and “drag-along” 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

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

deadlock provisions

dispute resolution provisions

the governing law of the shareholders’ agreement

allocation of key roles or responsibilities

Glossary

Drag-Along 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. Drag-along rights typically terminate upon an initial public offering.

Tag-along 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 shareholders. Tag-along rights are fairly standard terms in shareholders agreements.