Shareholder Agreement and Pre-Emptive Rights - Research Paper Example

What is the Interaction between Agreements between Shareholders? Introduction A shareholder is someone who owns one or more shares of stock in a company. The shareholders bare liable to receive the benefit from the company’s earning and assets as well as the shareholders are liable to share the liability if the company owes or if the company goes bankrupt. It is worth mentioning that corporation are governing by the combination of legislative, contractual, property law and other legal theories. It can be argued that the origins of company primarily lie in the contract or the agreement and in statute. Contextually, the rise of the shareholders agreement can be associated further with strengthening the scope of contract in the corporate law. However, it can be stated that the, scope of the shareholder agreement is limited on the ground of statutory regulations of the corporations. It can further be stated that shareholder agreement holds the very less possibility of the making any inequitable conduct to equitable one. Shareholder Agreement Shareholder agreement in its simple meaning can be define as the contract between the some or all the shareholders of the company. The primary purpose of the shareholder agreement is to provide way in which the company will be effectively managed. Furthermore, the shareholder agreement aims at addressing various issues within the company that may have significant impact on the operation of the company as well as on the relationship of the shareholders of the It is worth mentioning that shareholder remedies on the basis of shareholder agreement often acts like unique viewpoint in matters related with shareholders remedies. Historically, the shareholders remedies were incorporated in the common law which was substantially codified in the statute. Nonetheless the right tom shareholder remedies are not rigidly relied only on the contract even though the relationships based on the agreement are continuous and activities in the corporate entity. There are various provisions that are duly supported in the shareholders’ agreement. Some of the common principles and standards that are covered under the shareholder’s agreement are illustrated below: Promoting the status of quo among those founding directors Ensuring a particular structure of the corporation Effectively dealing with the succession factors Attempts to identify and allocate corporation’s values and priorities as well as policies Intends to .clarify the role of the management and the shareholders Intends to direct the relationships among the shareholders of the company Aims at effectively dealing with the valuation issues and procedures Attempts to protect the rights of minorities Intends to preserve the confidentiality It is often being argued that at the different level of the authority within the company, the majority rule tends to prevails. Contextually, the shareholders agreement intends to protect the rights of every shareholders of the company by eliminating jeopardize related with the rule of majority. There has been consistent debate on the shareholders agreement usually based on the view of ‘liberty of contract.’ However, the notion of shareholder agreement has not been in so much of limelight in the context of Australia. Additionally, it is vital to note that shareholder agreement in Australia cannot override the statutory contract in the Australia. In Australia shareholders agreement are quite often used in the private companies. Notably the majority of these companies are proprietary companies which ate limited by shares. On the other hand the shareholders’ agreement is rarely being used in the companies with large shareholders bases. The shareholders’ agreement in Australia not primarily regulated by the statute law instead the agreement is considered to be the manifestation of the contract. Since, Australia functions under the common law system; the shareholders’ agreement is also regulated under common law standards of contract law. Accordingly, it can be stated that the shareholders’ agreement does not have to comply with any set procedures or the principles however, it is important that the shareholders’ agreement entered by the parties or the shareholders of the company are duly valid and enforceable under the law principles. The various provisions under the law of Australia regulating share transfers Pre-Emptive Rights According to the pre-emptive rights the transferor of the shares who intends to sell the shares held by him/her is obliged to offer the shares proposed for sell to the remaining shareholders of the company before offering to any other third parties on the basis of existing pro-rata. On the other hand other shareholders are eligible to offer to purchase more than the allocated pro-rata allocations. Notably, the pre-emptive rights generally establish method for determining the value of shares intended to offer. Drag-Along, Tag-Along Rights In relation to the drag along option, a specified number of majority shareholders are eligible to seek minority shareholders to accompany in the sale of the shares. Contextually, the percentage required to determine the majority within the company is specified either under the constitution or under the shareholders’ agreement. Additionally, it is emphasised that where the majority of the shareholders are willing to sell their shares, the minority shareholders are also required to follow them and sell their stake. It is worth mentioning, the value of minority shareholders’ stakes are perceived to be same in terms of both price and warranties. Right to Refuse Transfer Right to refuse transfer which are often articulated in the constitution the private companies provides the Board with the right to refuse to register a transfer of shares at its own judgement without being obliged to provide reasons on such refusal claimed postulated by the Board of the company. Board Consent to Transfer Since the board of the company has the right to refusal t the transfer of the company’s shares, the transferor willing to transfer his/her shares are required to obtain prior consent from the boards of the company informing them his/her willingness for transferring shares to the specific category of the person. Required Transfers: During certain circumstances such as death or bankruptcy of a shareholder may create necessities for transferring shares. In such circumstances or the events the company has the right to transfer the persons’ shares. Additionally, the shareholders’ agreement is subject to the ordinary contract rules during the vent of disputes. Moreover, the articulations presented in the article of association have become primary standards and considerations that are judicially been adhered over the years. There are various provisions articulated under the shareholders agreement which are being explained briefly: Management and Director Structure The shareholders’ agreement provisions deals with the regulations related with the management and the structure of the directors of the company. Additionally, the agreement also provides provisions regarding the right of the shareholders concerning with the appointment as well as the removal of the nominee directors. Shareholders and Directors Meetings The shareholders’ agreement also incorporates provisions relating with the arrangement of the shareholders and directors meetings. These provisions deals with how and when meetings shall be arranged relating to certain specific factors such as issuing of new shares, acquiring of significant assets, incurring liabilities or debt and also in certain aspects relating t the changes in the business. Notably, all the above stated factors require unanimous consent or the certain majority of votes. Accounts, Funding and Dividends Account, funding and dividends are another crucial factor for which the shareholders’ agreement contents certain specific provisions. This provision emphasises on receiving due approval from the shareholder in matters related with company’s business plan as well as budgets. Additionally, the provision advocates on providing shareholders with an opportunity to make comment. The agreement also entails provisions related with dividends as well as other policy concerning with profit distribution. Optional/Deemed Transfers, Valuation, Exit This provisions deals with providing mechanisms such as restrictions on the transfer of shares. In other words the provisions incorporates the certain specific events or circumstances in which shareholders will have the right to transfer shares as well as the provision also emphasises on the methodology or the formula which shall be taken into considerations for determining nthe value of the shares intended to be transfer. Contracts with the Company, Non-Compete and Confidentiality The shareholders’ agreement also provides provisions related with terms and conditions that facilitates shareholders to enter contract with the company. The agreement further contains provisions concerning with confidentiality issues associated with shareholders and the company. Breach, Dispute and Deadlock Resolution The provisions related with the breach of agreement and its related consequences are also mentioned in the shareholders agreement. Furthermore the provisions concerning with dispute resolution between shareholders which may occur under the shareholders agreement or Board level are also specified in the agreement. Accession The provisions related with terms and conditions that need to be fulfilled prior to the issue of shares or transfer of shares. The provision requires that person involved in the issue or t5ransfer of share should duly execute a deed of accession in order to bound by the shareholders agreement. Shareholders remedies The parties involved in the shareholder agreement have the complete rights to seek remedies for the breach of contract in the cases related with injunctions, specific performances and damages. In addition, the remedies related with pre-contractual performances dealing with validity of contracts are also available to the victim party. The pre-contractual conduct comprises of damages resulted due to misrepresentation as well as the remedies are also available in matters concerning with deceptive actions. Specific performances and injunction The crucial remedy under the shareholders agreement can be related with the equitable remedy associated with the particular performances. Accordingly, a shareholder possesses the right to influence another shareholder to bind with the provisions and terms of the shareholders’ agreement. The plaintiff thus can ask the court to make judgment seeking another shareholder to display a specific conduct as articulated in the shareholders’ agreement. However, it is not always an easy task to seek remedy. There are certain discretionary components influencing the shareholders remedies such as: The need to postulate that the plaintiff is willing to display actions according to the shareholders agreement. It is also crucial that the factor of mutuality between the defendant and plaintiff are visible It is equally important that defendant is not supposed to severe unfairness It must be ensure that there has not been any mistake or misrepresentation to the defendant Certain circumstances where there is unavailability of any specific performances within the shareholders agreement, provide the evidence in the relationships breakdown between the shareholders and further the remedy shall be seek on the basis of traditional company law of oppression or winding up on an equitable ground. Damages In relation to the unavailability of the specific performances concerning with the actions for damages, may create problems seeking appropriate judgement. Nonetheless, it is crucial to quantify the damages to the plaintiff caused by the actions arising from breach of defendants. Unarguably, the extent to which loss has been incurred is bear by the company. Rescission In certain circumstances where there is a breach of contract by one or the shareholder of the company fundamental to the terms and conditions of the shareholders agreement may result in withdrawal of the entire agreement. Advantages The shareholder agreement provides various advantages to the shareholder of the company. Some of the vital advantages claimed by the shareholder agreement bare illustrated below: Privacy The primary reasons behind the creation of shareholder agreement are often related with the privacy factor of the various documents. Thus, the shareholder agreement is subject to eliminate the confidentiality of relevant information between the shareholders. Greater Binding effort In addition to the elimination of confidentiality issues, the shareholder agreement has the capacity bind the shareholders of the company by providing certain specific rights and by imposing obligations towards the company to those entered into the shareholders’ agreement. . Disadvantages Binding Effect The shareholders’ agreement also possesses some of the major disadvantages along with few vital benefits. Correspondingly, it the nature of the shareholder agreement only binds those parties involved in the agreement and not all the shareholders of the company. Oppression It can be stated that there are several forms of oppression that are active in the current corporate circumstances. The degree of oppression influencing the shareholders may greatly vary from one context to another. Thus it would be wise to identify the various forms of oppression that are commonly being practiced in the Australian corporations: Executive shareholders paying Themselves Excessive Remuneration In certain specific situation excessive remuneration provided to the administrative level such the executive of the company may lead towards oppression under the statute. Notably, the amount of salary or any other benefits that are paid often depends on the evidence of comparable disbursement concerning to similar responsibilities. However, it is important to identify that such comparisons are quite difficult to make as the duties and the responsibilities of the two executives are not always same in one or the other way. Contextually, it is crucial to determine whether the estimation of remuneration by the directors or the executive was bona-fide attempt or not. Majority of shareholders restricting dividends without good business reasons It is worth mentioning that the failure to pay dividends in certain circumstances even though the present of sufficient ability to pay dividends could not be associated with the act of oppression. However, in certain circumstances only such act can be related with the conduct of oppression. It is crucial to consider the history as well as the financial status of the company. Notably, if the dividends wre not declared or paid to the shareholders due to sme major problems related to the company or simply for the benefit of the company, it does not fall under the act of oppression. On the other hand, if the shareholders are not paid with the dividends despite of the availability of the large resources and without any reasons it can be termed as the act of oppression. Reducing shareholders interest in the company by making a share issue contrary to legitimate Expectations and /or contrary to mutual trust and confidence It can be argued that no oppression act is considered in matters related with allocation of shares. Nonetheless such act can fall into the category of oppression, if the majority of shareholders primary motive behind such allotment of shares is for gaining personal interest or self-benefit purpose or if the act is against the principle governing mutual trust. Excluding Minority Shareholders from a salaried position within the company Often oppression related to minority shareholders are witnessed in several companies. Contextually, at times the right of minority shareholders are exploited. This type of situation often erupts when the minority shareholders failed to protect themselves. The act of oppression related to minority can be viewed when directors of the company curtail the benefits provided to the minority for example excluding the minority from salaried employment. Board Meetings Tactics In certain conditions the cumulative consequences related with array of incidents in matter concerning to board meetings can lead towards the oppression actions. There are various acts that can be related with oppression. For instances, if a board member particularly uses tactical issues in order to gain personal advantages on the cost of other members or the shareholders, such act can be termed as the oppressive action. Moreover, when the majority of members chooses to appoint incompetent person despite the presence of suitable person through their voting rights such act can also be termed as the act of oppression. Diverting Business from the company by the majority shareholders The majority of shareholders may often tend to diverse the business of the company which shall contribute to the oppression. Additionally, the attempt of the majority shareholders to divert the assets of the company towards self interest is also termed as the act of oppression. Statutory Remedies for Oppression Today most of the activities that an individual deals are firmly regulated by certain statute. Generally speaking the corporate and commercial activity are widely been governed by several statutes that offers courts with numerous remedial powers related with certain specific circumstances. Part 2f.1 of the corporation Act deals with the relief from consequences of oppressions. Contextually, the section 232 to 235 of the Corporations Act governs the issues related with oppressions. Accordingly, the section 232 provides directions wherein the court can create order under the section 233. In another words the court can make order if the action of the corporation’s affairs that is being proposed or performed by the member of the company is oppose to the interest of the other members of the company or is oppressive to certain level. On the other hand section 233 postulates remedies that are available under the Part. The remedies or the decision made by the court may incorporate is considered to be appropriate with respect to the corporation. Additionally, the remedies that may provide be result in complete winding up of the company. Furthermore, the order of the court may require the changes in the existing constitution of the company or may issues certain specific regulations for restricting such act or the affairs within the future period. Similarly section 234 articulates the standards for those eligible for applying for remedy under the section 233. According to this section any individual who is the member of the company and who is been isolated from the list of the members due to the selective reduction or the person to whom the share of the company is transmitted either willingly or under the operational law. Furthermore, where there arises a situation of oppression leading towards unfair discrimination or unfair prejudicial consequences, the shareholders have the legitimate right to seek remedy. Notably, the statutory actions are directed to the conduct or the event that amounts to unjust treatment to the interest of shareholders of the company (in many cases the minority shareholders of the company). The procedures related to Part 2F.1 at times lead or attracted towards the decisions that is being made by the directors in good faith purposes which the some of the shareholders may find or think unjust and unfair. Even though the identification of unfairness can be argued to be objective but it is often quite difficult to sets standards for trhe directors roles, responsibilities, skills and acumen. Broad powers underlies in the hands of the courts in order to effectively deal with shareholders oppressions and for providing adequate remedy to those shareholders who have suffered from oppression. Read More

 

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