shareholders' agreement

Definition of shareholders' agreement

Further reading

A shareholders' agreement (sometimes referred to in the U.S. as a stockholders' agreement) 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 it is quite common in practice for the shareholder 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:

• a company's constitutional documents are normally available for public inspection, whereas the terms of a shareholders' agreement, as a private law contract, are normally confidential between the parties.
• contractual arrangements are generally cheaper and less formal to form, administer, revise or terminate.
• the shareholders might wish to provide for disputes to be resolved by arbitration, or in the courts of a foreign country (meaning a country other than the country in which the company is incorporated). In some countries, corporate law does not permit such dispute resolution clauses to be included in the constitutional documents.
• greater flexibility; the shareholders may anticipate that the company's business requires regular changes to their arrangements, and it may be unwieldy to repeatedly amend the corporate constitution.
• corporate law in the relevant company may not provide sufficient protection for minority shareholders, who may seek to better protect their position by using a shareholders' agreement
• to provide mechanisms for removing minority shareholders which preserve the company as a going concern.