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Business Formation, Regulation and Corporate Matters

What exactly are Shareholder agreements used for and when are they needed?

A shareholders’ agreement outlines the rights, duties, and obligations of the Company, the Directors and shareholders and bind the parties to its terms. It sets out conditions on how the Company will be run, major decisions made, what actions will be taken on specified events and how rights and interests of shareholders will be protected. It is signed by all participating shareholders of a Company and records the share capital ownership structure. Shareholder agreements are carried out on the mutual understanding and principle that all shareholders will exercise their voting rights in accordance with the agreement.

Shareholder agreements offer certainty in corporate business ventures as there is less risk when a written agreement exists which covers various areas which may, at some point, become a bone of contention between existing Company shareholders and/or new investors. New individuals or companies which invest money in a particular company and purchase its shares, for example, must sign documents which legally bind them as a shareholder to an already-existing shareholders agreement (sometimes called deeds of adherence, accession etc.).

Having an existing agreement can demonstrate stability and cohesion within the Company and shareholders, which is important for creditors and outside investors. As they are readily enforceable in Pakistani Courts, shareholder agreements have become a popular way for business partners to formalize an agreed way of running a company. They are also private documents and there is no requirement under law to file it with any regulatory authority (such as the SECP). Hence, because it is a private document (unlike the AOA of a Company), shareholders are more comfortable with its confidential nature where several different arrangements may be agreed and written down.