A shareholder agreement is basically a contract that outlines the rights, responsibilities, and obligations of the shareholders of a company. This type of agreement is used to govern the relationship between the shareholders and provide a framework for decision-making and dispute resolution. This article shall address the reasons why shareholders of a company may decide to enter into a shareholder agreement as well as the types of issues and topics which should be covered in this type of contract.
Reasons why to have a Shareholder Agreement
Some of the key reasons as to why shareholders may decide to use this type of contract are as follows:
- Arguably, one of the main reasons is to protect certain shareholder rights. A shareholder agreement can protect the rights of minority shareholders by setting out provisions for voting rights, dividend distribution, and access to company information. A shareholder agreement can also help to ensure that all shareholders are treated justly and have input into important matters impacting the company such as capital increases, decreases and other major decisions.
- Another significant reason is that shareholder agreements can help to establish rules and procedures for making major decisions within the company, such as appointing directors, increasing registered capital, approving mergers or acquisitions, and amending the company's articles of association. This can help the shareholders to avoid unnecessary and costly conflicts and provide transparency on decision-making processes effecting a company.
- One of the most important and frequently used motives behind using shareholder agreements is to limit and control share transfers so that existing shareholders can have control over who can become a shareholder of the company. This in turn helps to maintain stability within a company and prevents unwanted or undesirable shareholders from gaining influence, such as competitors etc.
- Resolving disputes is another rationale behind why shareholder agreements are often used given that they can set out various dispute resolution procedures for the shareholders to follow in case a dispute later arises between them, such as mediation, arbitration, or simply using the courts of a certain jurisdiction.
- Protecting confidential information is another reason why many shareholders desire to use this type of contract. These type of agreements often include clauses which require shareholders to protect the secret information of a company (such as trade secrets or certain intellectual property) for a certain amount of time; often such time period does not just extend to when they are a shareholder but usually until a certain period after they exit their shareholding position in a company.
- Ensuring that shareholders will not compete with the company is another key factor as to why shareholders use this type of contract. Many shareholder agreements contain detailed non-compete provisions which limit shareholders rights to use a company's know-how, trade secrets so as to prevent them from unfairly competing against the company or from poaching key staff. On a side note, these types of clauses must be carefully drafted to ensure that they are legally enforceable in Thailand.
What to include in a Shareholder Agreement?
A shareholder agreement can be detailed or very brief in terms of its content depending on what the shareholders agree upon, however the writer recommends that shareholders should cover the following matters when having a shareholder agreement drafted:
a. As a starting point, a shareholder agreement should clearly specify the identities of each respective shareholder as of the effective date of the agreement, it would also be prudent to detail their respective shareholding position in the company so that it is clear as to who owns what percentage of the shares.
b. Purpose and Scope: At the beginning of a shareholder agreement, it would be prudent to define the purpose and scope of the contract, outlining how it shall apply to the shareholders and their relationship with the company.
c. Board of Directors: Another important issue to address is the composition, appointment, and removal of directors, as well who shall be an authorized director of the company and what their respective signing authority shall be. The signing conditions of the authorized directors should be reflected in the company's affidavit of company registration as issued by the Department of Business Development (DBD).
d. Increases to the Registered Capital: To avoid conflicts later arising, it is sensible to address the initial registered capital contributions required from the shareholders, as well as any future capital requirements, and the mechanisms for additional funding.
e. Exit Strategies: To avoid unnecessary conflict amongst shareholders, it is often a good idea for a shareholder agreement to provide an exit strategy for shareholders, such as the right to sell and transfer their shares to other shareholders in certain cases as well as the procedure for valuing the shares.
f. Confidentiality and Intellectual Property Protection: A shareholder agreement can include clauses designed to safeguard a company's confidential information and intellectual property rights, thereby helping to prevent shareholders from disclosing sensitive information or misusing the company's intellectual property.
g. Having an indemnification clause in case of shareholder breach or default of the shareholder agreement is another sensible clause to include in such a contract as it can help the non-breaching shareholder(s) to be able to claim against a breaching/defaulting party to the agreement.
h. Specifying basic key contractual terms such as what the governing law and jurisdiction shall be is also advisable. Moreover, it would be practical for a shareholder agreement to have a termination clause covering situations where the shareholders can terminate the agreement such as via mutual termination or based on some other agreed grounds.
i. Limiting Share Transfers: As mentioned earlier in the article, it is often a good idea for a shareholder agreement to include provisions covering when share transfers are permitted and what (if any) limitations shall be imposed on transfers such as the need for a special resolution of shareholders to be passed before a transfer is permitted or whether a certain shareholder shall have the first right of refusal.
In conclusion, the writer would like to emphasize that it is important that shareholder agreements should be drafted with the assistance of legal professionals to ensure compliance with applicable laws and to address the specific requirements of a company and its shareholders. Furthermore, it is worth noting that under Thai law, it is not necessary for the shareholders of a company to have a shareholder agreement but in some cases it can be a good idea given the extra safeguards it can provide.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
