Why have a shareholders’ agreement?

Why not just rely on the company’s constitution?

A shareholders’ agreement governs the relationship (1) between shareholders themselves; and (2) between the shareholders and the company (if the company is a party to the shareholders’ agreement).

Three reasons to have a shareholders’ agreement when there is more than one shareholder in a private company:

1. Confidentiality

Unlike a company’s constitution, which must be lodged with the Registrar of Companies and is therefore publicly available, a shareholders’ agreement is a private contract between the shareholders. A shareholders’ agreement does not need to be disclosed publicly. Shareholders who wish to keep certain aspects of their relationship or business arrangements confidential often prefer to include those provisions in a shareholders’ agreement rather than in the company’s constitution.

2. Ability to sue directly

As a party to the shareholders’ agreement, a shareholder can bring an action for breach of the shareholders’ agreement in his/her own name. In contrast, bringing a claim under the constitution is more complicated as it may require the claim to be brought in the name of the company rather than in the name of the relevant shareholder.

3. Customised contract between shareholders

Unlike a company’s constitution, which requires the consent of just 75% of shareholders to be binding on all shareholders (including future shareholders), a shareholders’ agreement is a dynamic, negotiated contract. It must be executed by each relevant shareholder to be binding on that shareholder. As a result, a shareholders’ agreement is often more effective in ensuring that its provisions are actively brought to the attention of shareholders—especially those who may not pay as much attention to the company’s constitution.

This post first posted on LinkedIn on 14 November 2024.