What are the rights and obligations of shareholders? What is the best way to incorporate them in the constitutional document or the shareholders’ agreement?
Fundamental framework of rights and obligations
It is vital that the shareholders’ rights and obligations be properly understood and set up in order to minimise conflicts and to ensure that the company works well in the long term. In a joint venture, each shareholder brings not only their capital to the company, but often also expertise, experience, and a commitment to participate in its business activities. When providing for the rules governing the shareholders’ rights and obligations, the above aspects should be taken into account at the outset of the cooperation.
Shareholders’ rights
1. Profit share: Depending on the size of their share or other arrangement set forth in the memorandum or articles of association, the shareholders are entitled to participate in the company’s profits. It is important that the shareholders’ agreement clearly sets out the profit payment mechanism and the cases where profits may be reinvested in the company. Other rights include the right to a share in the net value following the wind-up process and the right to a payment in the event of the shareholder’s exit other than the sale of their share.
2. Voting rights: Each shareholder may participate in the decision-making process on material affairs of the company. The weight of the vote often corresponds to the size of the shareholding, but different voting models may also be set up in general or for certain situations only, such as enhanced rights for minority shareholders (the right of veto for specific matters). If necessary, a share without voting rights may also be created.
3. Right to information: Shareholders have the right to be informed of important facts pertaining to the company. This includes a very broad right to request information about the company from its executive directors and the right of access to the company’s documents. Please note that this right of the company’s shareholders is limited, being closely linked to the matters included on the agenda of the general meeting. A shareholder may only request such explanation that is necessary to assess the matters that are part of the agenda of the general meeting. However, this right may be modified in the shareholders’ agreement and by the subsequent amendment of the company’s articles of association.
Shareholders’ obligations
1. Equity contribution: The shareholders are obliged to meet their obligations in respect of equity contributions in the amount and within the time limit provided for by the constitutional document and in accordance with corporate law.
2. Loyalty towards the company: The shareholders should act in the company’s interest, avoiding actions that could harm the company.
3. Participation in decision-making: In the shareholders’ agreement, the shareholders should undertake, to a certain extent, to participate in general meetings and other key company meetings. Absence from these meetings can disrupt the company’s operations, especially if certain quorums and majorities are required for fundamental decisions.
4. Payment of liabilities: If the company is unable to meet its obligations, the shareholders are liable as provided for in the law and/or the constitutional document. In addition, the articles of association may impose additional contribution obligations on the shareholders.
Conflicts between shareholders
Different ideas about their rights and obligations often lead to conflicts between shareholders. For example, disagreements can arise where one shareholder expects to be paid the profits of the company while the other prefers to reinvest them. Such conflicts can be minimised by:
- clearly defining the rules in the shareholders’ agreement;
- including dispute resolution mechanisms such as mediation or arbitration;
- regular communication between shareholders and transparent access to information.
Practical recommendations
1. Take into account the size and nature of the company when setting up the shareholders’ rights and obligations. You may need a different approach when establishing a smaller family business than a joint venture with third parties.
2. Seek legal advice to draft your shareholders’ agreement or adapt the constitutional document to the agreement. These documents should be as tailored as possible to the specific situation and needs of the company.
3. Continually update the rules and arrangements to reflect the changing needs of the company. What may have been suitable at the beginning may not be relevant a few years later.
Conclusion
The correct setup of the shareholders’ rights and obligations is the cornerstone of any company. Most importantly, it helps to prevent conflicts between shareholders and ensures that the company is run in a smooth manner.
At HAVEL & PARTNERS, we have extensive experience in these topics. We will be happy to assist you in setting up effective rules that meet your company’s needs, and to lay the foundation for the success of your business.
