A shareholder contract (SHA) is a contract between the shareholders of a company and often the company itself. A SHA defines shareholder rights and obligations, regulates the management of the company, ownership of shares, privileges, votes and various guarantees for shareholders. A SHA aims to set rules for shareholders to anticipate issues that may become controversial in the future. A SHA will generally indicate the number of original board members (and often their names and other details) and sometimes the rights of some shareholders to appoint a certain number of board members. Other shareholders, without the right to appoint directors, must vote in accordance with the company`s by-law. Because anti-dilution provisions can result in restrictions on a company`s future fundraising, they can be structured in terms of pay-to-play. This only protects investors from dilution if they participate in future capital raising transactions. Investors who do not participate do not have anti-dilution protection. This will benefit the company and investors as it encourages all investors to continue to finance the business.
The provisions of the legal shareholder contract replace corporate law obligations. As a result, public servants and directors who violate the governance requirements of a shareholders` pact may be subject to ultravires or breaches of trust obligations and court mandamus jurisdiction, rather than simply being liable for an infringement. However, the operation of the shareholder contract should not be used to influence a shareholder`s personal liability for corporate actions, otherwise the absence of such liability. This broad shareholders` pact also includes the company`s share transfer clauses, pre-emption rights in the transfer of shares, for which anyone wishing to sell their shares at a later date must first offer the shares to other shareholders, and it also contains a Tag Along clause. Finally, a confidentiality clause and a non-compete, non-solicitation and non-financing clause were included in the agreement to protect the interests of the company.