Last updated: October 14, 2016 at 7:04 am
As the name implies, the shareholder agreement is an agreement between the shareholders of the Limited Company. It provides certainty as to the rules, and regulates the relations between the shareholders.
You should never, in any circumstances use a standard shareholder agreement, but make sure you get competent advice, even if the new Limited Company has only one shareholder initially.
The shareholder agreement is a confidential document. therefore, it is a better way to regulate certain arrangements than by using the public form of the “Articles of Association”.
In the shareholder agreement the following points should be addressed:
Cypriot law defines requirements for some decisions which require a majority, such as changing the statutes or the company name.
Many other important decisions, such as the strategic direction of the company, borrowing, or the setting up of subsidiaries, are outside the focus of the “Companies Act” and are made by the directors, unless the shareholder agreement provides otherwise.
In certain cases, a suitably drawn-up agreement can provide protection, because the decisions depend on getting a suitable majority.
The management of daily operations is in the hands of directors who may be supplemented by a supervisory board in the form of a ” Board of Directors ” which lays down strategic guidelines and supervises the directors.
No matter what size the enterprise is, an suitably designed shareholder agreement contains provisions on the scope and composition of the Board of Directors and the Supervisory Board (non-executive directors). It can restrict the rights of directors, so that certain decisions necessitate a decision of the shareholders.
In special cases, the shareholder agreement can therefore determine how and by whom directors can be appointed.
The dividend policy of a Limited Company can be defined as confidential in the shareholder agreement. The amount of dividend distibuted can be determined, for example, as a percentage of the free cash flow, and so can the timing of preliminary and final dividends.
Another benefit of a well-made shareholder agreement is to clarify how shares can be transfered. Be it an inheritance case or the divorce of a shareholder, the sale to third parties should be dependent upon the consent of the other shareholders.
Disputes and litigation
Disputes cannot always be avoided. At worst, it may come to a “deadlock”, to inability to make decisions, and this can seriously harm the company. A well-written shareholder agreement contains provisions which prevent stalemate situations or at least make them solvable.