The shareholders’ agreement, which occurs almost exclusively in private companies, often contains many of the provisions contained in the articles of association of the company.
The shareholders’ agreement will often contain provisions concerning what constitutes a deadlock, and how to resolve such a situation. A deadlock occurs where, for example, the company is divided 50/50 between two shareholders and an irreconcilable conflict arises over the management of the company. Typical events that trigger a deadlock may include a failure of both parties to approve specific matters of importance such as the annual business plan, failure to achieve a quorum for a meeting of the board or shareholders, either party voting against a resolution, or one party wishing to sell its shares but the other party not wishing to buy them and no third party buyer being found. A deadlock could be resolved in various ways, such as negotiations between the parties or their parent companies or referral to an external expert, but it is often a means of allowing one shareholder to buy out the other. The so-called Russian roulette mechanism is where either party may issue a notice fixing a price for the shares. The other party can either buy or sell shares at that price. A Texas shootout provision is where both parties submit sealed bids to an auctioneer and the party who makes the higher bid buys the company at that price.
Some shareholders’ agreements, for example in the context of a joint venture, will also typically include provisions on the financing of the company, as well as the dividend policy. Distributions to shareholders may be linked to funding in the sense that the shareholders may agree that no dividends will be made until all shareholder loans to the company have been repaid.