Shareholders Agreements

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This is the one of the foundation documents that regulates the relationship rights & obligations of the shareholders. Shareholders agreements are used in almost all investment transactions & are an essential document for any startup to understand & learn.

  • What is the Articles of Association “AoA” of the Company?
  • What is the Shareholders’ Agreement “SHA”?
  • What is the difference between the AoA and the SHA? Why shareholders need an SHA?
  • What are the clauses and rights which may be added in the SHA?
  • Can the Shareholders Agreement be amended?

What is the Articles of Association “AoA” of the Company?

Articles of association can be thought of as a user’s manual for a company, defining its purpose and outlining the methodology for accomplishing necessary day-to-day tasks.

It generally includes provisions on the company name, its purpose, the share capital, the company’s organization, provisions concerning shareholder meetings, and it may vary according to jurisdiction.

What is the Shareholders Agreement?

A shareholders’ agreement is an arrangement among a company’s shareholders that describes how the company should be operated and outlines shareholders’ rights and obligations. It also includes information on the management of the company, privileges and protection of shareholders.

What is the difference between the AoA and the SHA? Why shareholders need SHA?

    • There is a comprehensive body of law that governs how a company should run. SHA may contain almost any arrangement whereas the AoA must comply with Companies Law.
    • It is important to avoid conflicts between the SHA and AoA. The AoA will prevail and this will be enforceable as between the parties in case of conflict between the two documents.
    • SHA is not publicly registered, it is considered as a side agreement between the shareholders which grant to the shareholders the level of protection and granted rights.
    • Shareholders may agree on different clauses and terms in the SHA which grant to some them different rights and authorities.
    • You can add further rights in the SHA which are not stated in the AoA.

What are the clauses and rights which may be added in the SHA?

There are a lot of clauses which may be included in the SHA, the most common are:

Post- Incorporation of the company:

      • The matters which should be done after the Company is incorporated such as: Electing the board and grant authorities – approving the business plan, etc..
      • The Board and the Management: where the Shareholders agree on the Board structure, authorities, meetings, and voting powers.
      • Lockup Period: is a period of time when founders are not allowed to transfer or sell their shares. This is to assure the investors that the company’s founders are obliged to be in the company for a specific period.
      • Anti-Dilution: it protects a shareholder from equity dilution in case of capital injection in the company.
      • Right of First Refusal: such right gives a privilege to certain shareholders in case of sale of shares by one of the shareholders to another person, other shareholders in such case shall have the right to claim such shares with the same offer.
      • Pre-emptive Rights: this right gives the shareholders the right to subscribe to the company’s capital increase pro-rate to their equity in the company.
      • Tag-along: this right is used to protect a minority shareholder in case of a majority shareholder sells his shares, it gives the minority shareholder the right to join the sale and sell his minority shares in the company.
      • Drag-along: this right is used to protect the majority shareholder. it enables a majority shareholder to force a minority shareholder to join in the sale of a company.
      • Vesting of shares: means that shares held by founders are not fully owned by them and will be vested over a period of time at a specific percentage.


      • Good Leaver: If one of the Founders leaves the Company for an amicable reason it will offer for sale to the Company its vested shares at the fair market value.
      • Bad Leaver: If a Founder leaves the Company because for any criminal offence or commission of any act of fraud or dishonesty, the Founder shall offer for sale to the Company all of their unvested and vested shares at a very cheap price that will be agreed on in the SHA.
      • Reserved Matters: matters required a specific % or one of the shareholders’ approval first.
      • Exiting the Company: this clause in which the shareholders agree on the exit mechanism from the company.
      • Intellectual Property Rights “IPR”: this clause is important to save the IPR of the company and to assign all the IPR of the founders related to the business itself to be owned by the company.
      • Non-competition: by which the founders of the company agree not to compete with the company and not to be a shareholder/board member in any company with a similar activity.

Can the Shareholders’ Agreement be amended?

      • SHA can generally be amended by the agreement of all the parties.
      • In case of new shareholders entered into the company, they shall not be obliged by the SHA unless they signed the “Agreement of Adherence” by which they agree to become a party to an existing Shareholders’ Agreement.

Before you sign the SHA, make sure that you had a proper legal advice as it could be the beginning of your company, or its end!