Shareholders’ Agreements: Contractual Rights & The Articles of Association
Frequently shareholders of a Cyprus company forming a joint venture, or other distinct members of a corporate vehicle rely only on the contractual arrangement between them rather than taking the necessary steps to avert a future legal dispute by causing a company to act in accordance with its articles of association under the Cyprus Companies Law, CAP.113.
Typically in instances where there is more than one shareholder, whether through a Joint Venture or other arrangement, the shareholders of such a company, enter into a shareholders’ agreement to regulate both their venture and their rights and obligations thereunder. Such an agreement constitutes a private contractual arrangement between the parties to the agreement. The contracting parties to the shareholders’ agreement may or may not elect to insert the provisions of their private contractual arrangement in the articles of association of the company. However, shareholders should be aware that the decision to include the provisions of their contractual agreement in the articles of association will affect the nature of the legal rights that arise in the event of a dispute.
If the provisions of the shareholders’ agreement are, in fact, included in the articles of association, any corporate action will need to be taken consistently with the articles of association and, consequently, with the contractual terms of the shareholders’ agreement.
In contrast, if the provisions of the shareholders’ agreement are not included in the articles of association, an inconsistency may arise between the shareholders’ agreement and the articles of association and/or the shareholders’ agreement may contain additional requirements which may not be included in the articles of association. In that case, the validity of any corporate action will be governed by the articles of association even though such an action may be contrary to the shareholders’ agreement. Although, in such a case, the party who, by its vote or other behaviour, has caused the company to act in any way which is not consistent with the shareholders’ agreement, will be liable for breach of contract under the shareholders’ agreement, noting that the company’s action will not per se be invalid unless it contravenes its articles of association.
Such a breach will give the innocent party the right to damages, provided that such damage is proven. It is unlikely that a court in Cyprus will grant either specific performance of the shareholders’ agreement and/or interlocutory relief by way of an injunction preventing breach of the shareholders’ agreement. That is, if there is an inconsistency between the shareholders’ agreement and the articles of association, the validity of a corporate action will be governed by the articles of association but the wrongdoing shareholder will be liable for damages for breach of contract under the shareholders’ agreement.
In conclusion, shareholders’ agreements do not bind a company to uphold the provisions thereof, a company is only bound to act in accordance with its articles of association, to cause a company to act in accordance with the contractual arrangement between the shareholders the provisions of the contract must be incorporated into the articles of association of the said company, otherwise a shareholder bears the risk of limiting legal recourse to an action for breach of contract under the Contracts Law Cap.149.