Shareholders' agreement

A shareholders' agreement (sometimes referred to in the U.S. as a stockholders' agreement), SHA in short is an agreement amongst the shareholders of a company.

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. 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.

Common characteristics

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:


  1. For example, in many countries, the only remedy where the company is being run in a manner prejudicial to the minority shareholders is a just and equitable "winding-up" of the company, which is the commercial equivalent of the judgment of Solomon. By putting put and call options in a shareholders' agreement, the parties can ensure that a dissenting minority can be bought out at a fair value without destroying the company.
  2. Under English law, a shareholders' agreement is often suggested as an inference of a "quasi-partnership", which entitles disappointed partners to certain shareholder remedies, see Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
  3. Although, in each case, this would only be likely if the agreement covered more than one company.
  4. "Tag along" rights refer to the power of a minority shareholder to sell their shares to a purchaser at the same price as any other selling shareholder, ie. if one shareholder wants to sell, they can only do so if the buyer agrees to buy out the other shareholders who wish to sell at the same price. "Drag along" refers to the power of larger shareholders to compel the minority shareholder to sell when a purchaser wants to acquire 100% (or in some cases a majority stake) of the company, ie. a purchaser wishes to buy the company at a high valuation but only if they can purchase the entire issued share capital, and 3 out of the 4 shareholders wish to sell, but the 4th does not, well drafted drag-along rights would enable the 3 shareholders to compel the 4th to sell their share at the same price.
  5. For the normal position in relation to minority rights, see for example, Foss v Harbottle (1843) 2 Hare 461
  6. In a joint venture, "deadlock" refers to the parties being unable to agree on a key matter. If there are only two key parties, this can deadlock the vehicle, and leave it wallowing.
  7. Whilst this is often the same as the law of the company's incorporation, it is sometimes chosen deliberately to be different, so as to allow a more flexible law of contract to overcome perceived limitations in the corporate law of the company's jurisdiction.
  8. It is not uncommon to see shareholders' agreements between parties from developed countries and parties from emerging markets which provide that the company shall not engage in corrupt practices. Although in many countries it may be considered normal for local business to bribe officials to facilitate the conduct of business, many Western countries impose severe penalties on business who engage in corrupt practices abroad, and so Western investors often seek to ensure that their partners do not engage in anything which could breach such legislation in the Western investors' jurisdiction. See for example the Foreign Corrupt Practices Act in the U.S.A. and the Bribery Act 2010 in the UK

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