Shareholders’ Agreements – regulating the affairs of a company

Last Updated on Thursday, 4 August, 2022 at 11:44 am by Andre Camilleri

Krista Pisani Bencini is a senior associate within the Commercial and Corporate Department of Fenech & Fenech Advocates

This is the fourth part of a series of FAQs regarding the Memorandum and Articles of Association of a company incorporated in terms of the Companies Act (Chapter 386 of the Laws of Malta). This fourth part will delve into the relationship between Articles of Association and Shareholders’ Agreements

How do shareholders regulate their relationship?

While the Memorandum of Association is heavily conditioned by the requirements of the law, the Articles of Association give more freedom to the shareholders to contract and regulate the company they own. However, shareholders also have a further option when they come to regulate the affairs of their company. They may further enter into a “Shareholders’ Agreement”, which would regulate in greater detail their relationship as shareholders vis-a-vis their company.

Would a Shareholders’ Agreement form part of the Memorandum and Articles of Association?

The Shareholders’ Agreement (if entered into) exists apart from the Memorandum and the Articles of Association and is NOT one of the constitutional documents of a company (that is, it is not one of the documents which is required to set up a company at law).

However, when a Shareholders’ Agreement is entered into, the Articles and this agreement must work hand in hand. It would be both these documents which regulate the internal affairs of the company.

Is the Shareholders’ Agreement a public document?

Unlike the Memorandum and Articles of Association, the agreement is a private document by nature and strictly speaking it does not need to be registered with the Malta Business Registry. It is not specifically regulated by law.

The shareholders (and other parties to the Shareholders’ Agreement, if any) may therefore agree between themselves on matters which they do not necessarily wish to share with the public at large.

What happens when new shareholders’ join the business?

Third parties (who join the company at a later stage – new shareholders) are not automatically bound by the Shareholders’ Agreement, as they would the Articles. Provision would have to be made in the share transfer agreements for their accession to the shareholders’ agreement upon a transfer being made.

What is the main purpose behind a Shareholders’ Agreement?

The main purpose behind a Shareholders’ Agreement is generally for shareholders to agree among themselves on how they would vote in particular defined circumstance. Shareholders are free to include a number of other matters as they think appropriate, such as matters related to dividends and tag along or drag along provisions. Commercial matters, such as private arrangements between shareholders or between related entities, are also often included.

The most common provisions relate to what we refer to as “Shareholder Reserved Matters” and “Directors Reserved Matters” which would essentially list decisions which are to be left within the remit of the directors’ discretion and others which would be subject to a decision by a specified majority (often unanimity) of the shareholders. Typically, decisions above a specified threshold would be reserved for shareholders to decide upon.

How can we make this document and the Articles of Association work together?

Shareholders’ Agreements, as such, should be considered as “supplemental” to the Articles.  Often when there is a shareholders’ agreement between the first shareholders of a company, the advisors have to go through the laborious and often rather tedious process of bringing the Memorandum and Articles of Association in line with the Shareholders’ Agreement to avoid any conflicting clauses.

This process would also involve essentially selecting those clauses in the Shareholders’ Agreement which would not need to be replicated or somehow introduced in the Articles of Association. Not all clauses need to be public knowledge.

How important is it to ensure that there is no conflict between the two documents?

Apart from seeing which terms of the Shareholders’ Agreement to include in the Articles of Association, drafters would also have to ensure that what is included in the Articles does not conflict in any way with the contents of the Shareholders’ Agreement.

Often, there is a specific conflict clause included in the Shareholders’ Agreement giving priority to the Shareholders’ Agreement in case of conflict between the agreement and the M&As and obliging the parties to ensure that the M&As are always in line with the provisions of the agreement.

How can we ensure that there is no conflict?

Legal advisors often have to go through the painstaking process of analysing the provisions of the Articles and the Shareholders’ Agreement in order to bring the two documents in line with each other. Oftentimes a provision referring to the Shareholders’ Agreement is also included in the Articles of Association.

Advisors would particularly need to ensure that:

(a)        provisions which are of importance to third parties should be specifically stipulated in the Articles;

(b)        provisions of Schedule 1 of the Companies Act would be categorically excluded or retained, as applicable, in line with the Shareholders’ Agreement since said provisions would apply in default;

(c)        no conflict exists between the Shareholders’ Agreement and the Articles; and

(d)       what is not specifically regulated in the agreement is included in the Articles.

Would this approach be satisfactory to the registrar of companies?

The Registrar of Companies will not be privy to the Shareholders’ Agreement, so it is not in the competence of the Registrar to ensure that there is no conflict. The Registrar will register the Articles of Association and will not get into whether or not there is a Shareholders’ Agreement between the shareholders and what it contains.

Should the company itself be a party to the agreement?

Although this was common in the past, nowadays this is not considered necessary or even recommendable. The company should however be advised of the existence of such an agreement.

This was the last part of a set of FAQs focusing on the Memorandum and Articles of Association.

- Advertisement -