Introduction – what provisions are in the law, and what are not?
With reference to the previous series in this publication, we introduced the laws included in the law and laws that are not in law, which can still be included in the shareholders’ agreements by creating executable clauses for them. This series will explain why it is significant to ensure that all the necessary laws are brought to the attention of the shareholders and included in the shareholders’ agreement in an executable way. This will be established by exploring how to make executable clauses of provisions in the law and those not in the law in the shareholders’ agreements. The law sets out laws that are binding on the shareholders. Still, it does not specify how these should be incorporated in the shareholders’ agreement, thereby not showing how such rules or rights should be executed. The law does not establish all the provisions that can be added to the shareholders’ agreement. Therefore, it is significant that the clauses in the shareholders’ agreement ensure that the laws are included in an executable way. For instance, if a dispute arises between the company’s shareholders or the company is being sold after receiving a good offer price for it, the shareholders’ agreement can specify how the contract terms will be executed in such an instance, ensuring a fair and smooth business operation. Depending on the provision, its execution method differs; thereby, the execution of each provision should be specified in the shareholder’s agreement after laying out the law rule or the right under it.
This series will explore the practical incorporation of provisions in the shareholders’ agreement, whether they are in the law or not in the law. It will guide how to make these provisions actionable, ensuring the smooth functioning of the company’s business during its operations with the shareholders.
How can we change the execution methods of the provisions of corporate law?
The provisions of Federal Law No. (32) of 2021 on Commercial Companies produces the law in its general meaning; however, to act upon it, the provisions shall be altered to effectively executable clauses and incorporated into the shareholders’ agreement without changing their meaning in law. An executable clause is a statement that can be enforced and carried out according to its meaning. For instance, Article (233) establishes shareholders rights by stating: ‘’rights attaching to the share, particularly the right to a share of the profits and assets of the Company upon liquidation and to attend meetings of the General Assembly and vote on its resolutions, all in accordance with the terms and conditions provided by this Decree-Law and the AOA of the Company.’’ To make this executable, the contract should specify the specific rights of the shareholder to its share and how the shareholder can carry these out according to the profits and assets attached to the share during a company liquidation.
It shall precisely state the sum of money and the method of transferring this to the shareholders’ bank account according to their entitlement to the share. It shall provide specific guidelines on how the terms and conditions of the Federal Law and the company’s AOA come into play and what provisions are essential for the shareholders at the time of such company liquidation.
1. Timeline
Moreover, the performance of obligations under the shareholder agreement can be subject to being completed within a specific time frame. Tailoring such rights can enable including penalties for the shareholders if they fail to complete their obligations under the agreement in the agreed timeline. This could be a penalty payment of 5% for each day of not executing the specific obligations and performance under the shareholders’ agreement. This is a general optional clause that could be included in the shareholders’ agreement to ensure that the performance under the contract is reached.
2. Subject to performance
The law provisions can be altered in the shareholders’ agreement to be subject to the shareholder’s performance of an obligation, which shall then grant them their monthly payment under the agreement. This can be either i) a fixed salary payment to the shareholder or ii) a payment subject to the share profit.
3. Rights of manager
The shareholders’ agreement should state the co mpany manager’s mandatory obligations and powers and specify these extents. One of such rights is ensuring corporate governance. This is defined in Article 6 of The Federal Decree Law No. (32) of 2021 on Commercial Companies. It states that the board of directors or the manager shall be responsible for applying the governance rules and standards. To make this executable, it shall specify how this responsibility is carried out and what shall happen if it is not. This clause should state the manager’s other essential rights, such as the right to represent the company in potential litigation proceedings in arbitration cases. This includes granting the manager powers before settlement, conciliation, reconciliation, and mediation.
The Federal Decree Law No. (32) 2021 on Commercial Companies sets out prohibited acts of the Manager in Article (49). This states that the manager shall not act beyond the scope of his duties except if the parties have consented otherwise. This clause allows the partners to amend the right by defining its applicable instances and scope. It could also state procedures for non-compliance of such right. This way, the right will become executable.
4. Voting Rights
Voting rights are set out in The Federal Decree Law No. (32) of 2021 on Commercial Companies. These are mandatory rights that shall be granted equally to all shareholders. Article (146) establishes a voting mechanism for electing directors by giving each shareholder a number of votes equal to the share they hold. Article (188) grants the right to vote on the Resolutions of the General Assembly. It gives this right by stating that (1) ’’Subject to the provision of Article (146) of this Decree-Law, voting on the General Assembly’s resolutions shall be conducted via the method as determined by the AOA of the company.’’ It specifies the method by stating that ‘’It shall be permissible for voting on meetings of the General Assembly to be conducted using the online voting mechanism, provided that the controls and terms issued by the SCA in this regard are adhered to.’’ The Article creates an exception to this by establishing the exclusion of the directors from participating in voting on the resolutions of the General Assembly. To make this executable, the shareholder agreement clause could define the number of votes each shareholder has by the volume of shares they hold. This clause could also state that the manager will announce the annual meeting date and time. Then, the shareholders know 1) the value of their vote and 2) when they can vote.
How can provisions not in the law be incorporated into shareholder agreements?
There are different ways of including law provisions in shareholders’ agreements that are not in the law. These can be incorporated in alignment with the meaning given to them by the parties according to the purpose of the business. It could include provisions concerning who in the company can be a shareholder and what happens if a shareholder cannot be a shareholder anymore. It could also grant the shareholders more rights, such as a right for pre-emption, which, if drafted in the shareholder agreement, gives the majority shareholder the priority to purchase shares of a selling shareholder before they are offered to any of the other shareholders.
1. Preemption rights
To make an executable clause on preemption rights, it shall describe the partner who holds the priority right over the shares during their sale and specify that these are offered to him as a priority shareholder. This clause should also establish whether the priority shareholder does not want to purchase the shares, in which case the seller can sell them to anyone else in the company. This could be established in the agreement the following way: ‘’The First Party has a pre-emptive right to acquire shares offered for sale by the Second Party (the “Transferring Shareholder“). Then to establish whom it applies to by stating: ‘’This right applies to all transfers, whether full or partial, excluding transfers contemplated under the Company’s buy-back program.’’ To make such a clause executable, it should follow a clause specifying the execution: ‘’In the event the Second Party wishes to transfer shares to a person who is not a Shareholder, the following procedure shall apply:’’ (stating the procedure) This way, the provision will become executable and effective when one of the shareholders decides to sell its share.
2. Drag along
If an offer is made for the business by or on behalf of a person or entity for the offeror to acquire shares in the company upon giving a good offer price for the business, the following clauses are necessary to draft in the shareholder’s agreement to ensure a smooth operation of the company’s sale. This shall be established as follows: Upon any reasonable offer having been made, if the shareholders holding not less than seventy-five per cent (75%) of the shares to accept such offer, then all other shareholders shall be bound to sell all of their shares to the offeror at a price per share offered by the offeror, accepted by the majority shareholders pursuant to the relevant offer under the provisions of the Clause “Drag-Along Right”. Defining the operational procedure to use such right. To execute this right, the provision shall state the ways this right can be exercised, e.g. by saying that each of the accepting shareholders shall give every single shareholder who is not accepting the offer (dissenting shareholder’) a written notice called the drag-along notice, which the accepting shareholder accepts. This shall include the offeror’s name and address and the offeror’s price per share.
The provision in the contract specifying this procedure can include a clause stating executable steps for an instance where the dissenting shareholders do not accept the written notice to sell their shares. This could be specified by adding a timeline of seven business days after receipt of the drag-along notice for the shareholder to sell its shares to the offeror according to the terms and conditions set out in the drag-along notice. This could be subject to the shares to be sold in 21 days after receipt of the drag-along notice. To ensure the executability of such clause, the shareholder agreement could specify if the dissenting shareholder fails to comply with the obligations under this clause, the accepting shareholders or their representatives will be authorized to be the ‘attorney’ of such shareholders having the power to execute, complete and deliver a transfer of the dissenting shareholders’ shares or the offeror against payment of relevant purchase money of the company in the name of the dissenting shareholder, on behalf of him and provide a valid discharge to the offeror of it. In such instances, the money for the purchase shall be paid to a separate bank account with the company’s name. Hence, it shall be held for the offeror pending the completion of all the other transfer requirements for the registered title of shares held by such dissenting shareholders. Specifying this clause in the shareholder’s agreement will give such right to the majority shareholder if they wish to sell the company.
3. Tag-along rights
On the other hand, tag-along rights ensure that minority shareholders’ rights are included in the sale of their shares. The agreement could specify a clause that no transfer shall occur if the proposed transferee has not signed an offer in writing to the shareholders when selling the company’s shares so that the shareholders can acquire a similar proportion of the shares at this time. Hence, they will hold the shares on the same terms as the proposal to acquire such shares. To make this clause executable, it could specify that the sale of such shares shall become valid by the tag along with shareholders signing acceptance of the offer. The purchase of these shares shall be completed in 21 business days from the receipt of the acceptance. This could also include a clause that specifies that if the shares are sold to a third party, precise terms and conditions may apply. However, specifying such different instances is subject to the discretion of the company’s partners.
4. Lock-up
The shareholders’ agreement could include specific clauses for share transfers, such as a provision imposing a lock-up date for such transactions. This can be established by stating the effective date for the completion of the execution and the scope of its application. It could state: ‘’the specific shareholder whom the lock up applies to shall be prohibited to transfer, dispose of or encumber any their shares or interest without the other party’s written consent’’. To make this executable, it should specify the timeline, such as two years from the effective date, during which these restrictions apply to the shareholder. It could also impose a restriction when this right can be excluded: ‘’except for any transfers executed through the Second Party’s subsequent will or inheritance in respect of the Second Party’s first-degree relatives.’’
5. Loans over shares
Moreover, the shareholder agreement could include a clause permitting the possibility of imposing loans over the shares if this is something the partners wish to enable for their shareholders. To make such a clause executable, it could state, for example, the following: ’’The company may satisfy its additional financial requirement or working capital by way of loans (‘’Shareholder Loans’’). The lender shall enter into a separate loan agreement with the company. Any such loan agreement shall be subject to the following:’’ To make this clause executable, it shall state the action that is needed to be taken by the parties to execute this provision:‘’The Parties shall agree in writing on the interest payable on the Shareholders’ Loans at the time the Shareholders’ Loans, provided that such interest rate is within market rates, subject to all Shareholders’ approval.’’ ‘’Shareholders’ Loans shall be repaid according to an agreed-upon payment schedule to be included in the separate loan agreement;’’ This way, the shareholders know how to execute this right.
None of the above provisions are mandatory as they are not specified in the law. Therefore, it is crucial to be aware of them and their importance in including them in the shareholders’ agreement for the executability of such rights when an instance concerning them arises during business.
Conclusions
To conclude, it is essential that the partners of a business are aware of all the rights they have in law and those not in the law and to ensure that all necessary rights for the shareholders and the business are included in the shareholder’s agreement. This is necessary for the avoidance of complications, e.g., during a company sale. Hence, it is crucial that rights such as drag along and tag along are included in the shareholders’ agreement, as it may cause significant difficulty for the company to carry out the sale of the business at a time it wants to undertake such commencement.
