Shareholders' Agreements and the Articles: Structure, Clauses and Drafting Discipline
This article explains what a shareholders' agreement (SHA) is, how it sits beside the Articles of Association and the Companies Act, 2013, and what the principal clauses do.
It matters to practitioners because joint ventures, private equity rounds, start-up financings and closely held companies routinely depend on an SHA for the commercial terms that neither statute nor the Articles carry. Errors in alignment between the two documents tend to surface at the worst moment: a transfer, a fresh issue or a stalemate at board level.
The SHA and the Articles compared
An SHA is a contract between two or more shareholders and, in some cases, between the shareholders and the company. It records agreed arrangements on management, decision-making and the exercise of shareholder rights, adding detail to what the Companies Act, 2013 and the Articles provide.
The Articles are the company's constitutional document and bind the company and all its members. An SHA binds its parties, and does not necessarily bind the company in the same statutory sense. Two consequences follow:
- Important SHA provisions should be reflected in the Articles, which may need to be amended for the purpose, so that they operate against the company and every member.
- Where either document conflicts with mandatory law, the law prevails. Drafting therefore requires a reading of the Companies Act, 2013 and the rules under it and, where relevant, foreign exchange and securities laws.