A shareholders agreement sets the framework governing the relationship among the shareholders of a company which will determine the operations of the company. We have extensive experience in assisting our clients in representing both majority and minority shareholders in relation to a shareholders agreement and the surrounding negotiations.
Our focus is to understand clients’ business models and objectives to draft and negotiate the optimum shareholders agreement which will suit the plans for and constraints of the business and its shareholders. Hong Kong with its rules of law and effective court system is often used as a convenient jurisdiction in which to document shareholder arrangements were either the business or some or all of the parties are based in Asia. Hong Kong arbitration is also often a common choice of dispute resolution in shareholders agreements.
Shareholders agreements are not necessarily intended to govern the complete day to day operations of the underlying business and instead regulate the relationship between shareholders in respect of certain key issues. In this respect it is important when new shareholders coming together to start or continue a project both discuss and understand the expectations of the other parties and the underlying company to ensure they are ‘on the same page’. As such shareholders agreements can be all encompassing or limited depending on the nature of the relationship between shareholders, nature of the relevant business and the shareholding structure of the relevant company. Typical provisions that are included in shareholders agreements include:
- Board composition and conduct of board meetings provisions. The shareholders may want to include certain nomination rights allowing certain shareholders the right to nominate and have a director or directors appointed to the board. In addition to this, shareholders, especially those with veto rights, may want to ensure that appropriate quorum requirements are included in the shareholders agreement to ensure that board meetings and resolutions cannot be passed without their attendance. In addition the shareholders agreement may want to include notice provisions in respect of board meetings to allow sufficient time for directors to consider the issues to be voted upon and attend board meetings.
- Decision making provisions including veto matters, matters which are to be referred to the shareholders instead of being dealt with at the board level and deadlock resolution provisions. These provisions can become especially important to protect minority shareholders who would otherwise be unable to defeat a vote on a matter which may be prejudicial to their shareholding;
- Capital structure including provisions relating to the issue of share capital, pre-emption rights and capital contributions. Typically these types of anti-dilution provisions allow shareholders to ensure they keep their comparable interest in the company where capital is raised by the issue of new equity;
- Transfer restrictions including first rights of refusal, black-out periods, qualifications for shareholders and valuation procedures in events of default. It is important to consider appropriate valuation formulas to be used in circumstances where a shareholder is in default and their shares are offered for sale to the remaining shareholders;
- Default and termination provisions including dispute resolution terms, liquidation and pre-emption rights. In the event of deadlock or default there are various ways where the parties can bring the matter to conclusion and it is preferred to have these procedures agreed in the shareholders agreement prior to the dispute. Such procedures can include, mandatory arbitration, buy/sell options, Russian roulette, shoot out or auction options etc.
- Information rights including access to audited and unaudited accounts and access to operating premises.
In addition to considering the provisions of the shareholders agreement it may also be necessary to conform the articles of association or other constitutional document of the underlying entity with the terms of the shareholders agreement.
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