by Andria PapageorgiouShareholders’ Agreements
A. Introduction:
Under the Cyprus Companies Law, Cap 113 (hereinafter the ”Law”), all private limited Companies are required to adopt articles of association (hereinafter the ”AoA”) and a memorandum of association upon their incorporation. The AoA specify the regulations for a Company’s operations and management, and they set out the administrative and Company law procedures for carrying out the business affairs of the Company. It goes without saying that they are being drafted in accordance with the Law so that the provisions of Law are reflected in the regulations of a Company. The AoA are public documents, and the public can review them through the Registrar of Companies and Official Receiver of Cyprus.
A Shareholders’ Agreement (hereinafter the ”SHA”) is a private contract between the members of a Company. A SHA regulates the relationship between the Shareholders as well as setting the grounds in the event of a deadlock. Whilst Companies are not legally required to have a SHA (the Law does not make any references to SHA), it is important for the Shareholders to enter a SHA upon the incorporation of the Company in order to be aware of their rights and obligations towards each other. It is not necessary that the Company is a Party to a SHA.
B. When should the Shareholders enter a SHA:
From our experience, we would recommend for a SHA to be signed at the stage when you form the Company and issue the first shares. In fact, it is a good practice to ensure there is a common understanding of Shareholders’ expectations of the business.
C. What a SHA usually covers:
At Andria Papageorgiou Law Firm, we offer tailor-made solutions for SHAs drafted specifically to avoid future conflicts between the members of a Company, covering, among others, the below issues:
- The Company structure, including the composition of the share capital of the Company;
- Shareholders’ rights and obligations;
- Regulate the issuance, transfer and sale of shares of the Company;
- Regulate the appointment and resignation/removal of Directors;
- Restrictions on the activities of the Company, including provisions, requiring consent of all Shareholders, or approval by specific majority to enter new areas of business or territories;
- Set out provisions to resolve deadlock situations;
- Non-Competition issue, including provisions preventing shareholders from setting up competing business, to the Company, within a prescribed time period, or territory;
- Regulate the amount and way of declaring dividends;
- Confidentiality issue, including provisions relating to the exposure to publicity of the Company’s documents (Under Cyprus Law there is no obligation for the registration or deposit of the SHA with the Registrar of Companies); and
- Set out provisions for dispute resolution procedures.
D. What if there is a breach of the SHA:
In the event of a violation of the SHA by any contracting Party, then the other Party can enforce same by an action for specific performance, and for damages, as well as to apply for an injunction to block the violation of same.
It should also be noted however that any term of the SHA which contravenes any statutory provision of the Law is considered invalid under Cyprus Law. In addition to this point a SHA and the AoA of a Company should be consistent with one another.
E. Conclusion:
A SHA is a valuable tool, for providing a procedural framework, to regulate and govern the internal management of a Company, or joint venture.
In addition, through the use of a SHA, the Parties can achieve greater protection, of the rights of minority Shareholders, quick resolution of deadlocks, sufficient regulation of the rights of entry, or exit, of shareholders in the Company, secure methods of valuation of the fair value of the shares of the Company etc. Because the SHA, has the additional advantage of not being available to public, unlike the Company’s constitutions, sensitive details, regarding the role of the Parties in the Company’s management, their rights, and obligations etc., may be set out in the SHA.
The SHA shall be signed by all registered Shareholders of the Company, as well as by the Company, and in case of conflict between the terms of the AoA, and the terms of the SHA, the terms of the latter, prevail and have superior effect.
F. AP Law Firm:
Andria Papageorgiou Law Firm can assist you with the below:
- Provision of a Legal Opinion and Advice on the SHA;
- Drafting of a new tailor-made SHA;
- Review and Comment on any existing SHA;
- Provision of a Legal Advice on any dispute arising out of a SHA
Should you have any further questions, please do not hesitate to contact us at info@apapageorgiou.com.
Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.