A shareholders’ agreement consists of a signed contractual pact or accord involving a number of or all of the parties who own shares in a company. Frequently, a similar agreement may involve the company as a standalone body as well. The fundamental use of a shareholders’ agreement is to create a holistic framework to guide the administrative affairs of the company. It further articulates on how to handle matters that may cause undesirable rifts in the company setup. It is very important to inspect and analyze a shareholders’ agreement in combination with the constitution of that firm.
Explaining the Constitution of a Company
The constitution is a piece of documentation that leads, oversees and guides the administration affairs in any business entity. According to Section 31 Companies Act, 2014, creating a constitution is essential and obligatory for any business entity and its members. The members are only compelled to abide by the provisions of the constitution in their roles as owners of company shares and not in every other role.
Benefits Associated with Shareholders’ Agreements
A shareholders’ agreement is crafted as private documentation involving all concerned parties, and conveys confidential constraints. Thus a shareholders’ agreement is different from a constitution, which in essence, is a public document, freely accessed and scrutinized by anyone who wishes to, at the Companies Registration Office. This highlights the inappropriateness of using the constitution when handling delicate company issues such as information on salaries of individuals in directorial positions or other complicated issues pertaining to in-house administration and governance.
- Superior Binding Influence
As previously described, the constitution is limited to binding shareholders in their shareholding roles exclusively. However, shareholders’ agreements may be utilised to confer rights and compel the shareholders to perform certain stated responsibilities, for instance binding a senior manager in their directorial role. It is important to ensure that the duties assigned to a director by a shareholders’ agreement should not be in conflict with those stipulated for them in the constitution.
The constitution of a company may undergo revision through a special resolution. However, unless a shareholders’ agreement explicitly affords for a certain variation instrument to exist—its alteration can only occur if all concerned shareholders reach an undisputed decision.
Drawbacks Associated with Shareholders’ Agreements
- Binding Influence
By nature, a shareholders’ agreement outlines contractual obligations that only bind the involved members and does not necessarily imply bondage of the entirety of the shareholders body. As a result, if a party to a shareholders’ agreement decides to transfer his/her shares to another party, such an action does not necessarily bind the recipient to the stipulations of the shareholders’ agreement signed by the transferor.
To avoid such a scenario, the shareholders’ agreement usually imposes provisions that mandate its signatories to transfer their shares only to parties who are willing to abide by a deed of adherence—which compels them to become a partaker to the shareholders’ agreement as well.
Because the provisions of the shareholders’ agreements are in written word, there can be disputes over the interpretation of certain clauses stipulated in the contract.
For more information on the types of shareholders’ agreements available and procedures for creating it, contact qualified experts in Ireland to assist you.