I. Service Overview
TB Legal offers Shareholders’ Agreement drafting services for companies with two or more shareholders who want their commercial relationship to be governed by more than the general framework established by law and the company’s articles of association.
At the beginning of a business relationship, shareholders often share a common objective and mutual trust. As the company grows, however, issues arise that the parties may not have considered at the outset: how the business will be financed if additional capital is required, what information each shareholder will be entitled to receive, how the parties will act when important strategic decisions must be made, what happens if one shareholder wants to sell their share, and how the business should continue if cooperation between the shareholders becomes impossible.
A Shareholders’ Agreement is a separate contractual instrument between the shareholders designed to regulate such matters in advance.
It should not be confused with the company’s articles of association. The articles of association constitute the principal document governing the company’s corporate structure, while a Shareholders’ Agreement may establish additional rights, obligations, and terms of cooperation between the shareholders.
For this reason, drafting a Shareholders’ Agreement does not simply involve completing a standard template. Its content depends on the company’s ownership structure, the economic interests of the shareholders, their respective roles in the business, the financing model, and the specific risks associated with their relationship.
1. Who Needs a Shareholders’ Agreement?
Such an agreement is particularly important where a company has several shareholders, a 50/50 ownership structure, majority and minority shareholders, a joint venture, a family business, a startup, or where a new investor is entering the company.
The need for an agreement is even greater where shareholders perform different functions. One shareholder may finance the business, another may manage its day-to-day operations, while a third may be responsible for attracting clients or contribute specific technology or expertise.
In such circumstances, knowing only the percentage owned by each shareholder is often insufficient to regulate the actual relationship between them.
2. Why Is Tailored Drafting Important?
Two companies that appear similar may require completely different Shareholders’ Agreements.
In a 50/50 ownership structure, the critical issue may be the risk of decision-making deadlock. In an 80/20 structure, the central issue may instead be protection of the minority shareholder and access to information. Where an investor is involved, protection of the investment and arrangements for a future transaction may be key, while in a family business the principal concern may be the exit of a shareholder or changes in ownership.
For this reason, the agreement should be drafted only after assessing the particular company’s business model and the actual relationship between its shareholders.
II. What Is a Shareholders’ Agreement?
The current Law of Georgia on Entrepreneurs expressly recognises an agreement between shareholders of a limited liability company. Under Article 149 of the Law, the rules established by Articles 177 and 178 regarding shareholders’ agreements also apply to such agreements in an LLC.
The practical significance of this regulation is that shareholders may determine, through a separate agreement, the conditions under which certain rights will be exercised and related obligations performed between them.
At the same time, the law establishes several important limits that must be taken into account when drafting a Shareholders’ Agreement.
1. The Agreement Is Binding on Its Parties
The primary effect of a Shareholders’ Agreement is contractual. Under the current law, compliance with the agreement is mandatory for its parties.
This is particularly important where the parties establish a specific commercial logic for making decisions on certain matters. Merely including such a provision in the agreement does not mean that it will automatically alter the operation of the company’s corporate bodies as determined by law and the articles of association.
Moreover, the law expressly provides that breach of a Shareholders’ Agreement does not, by itself, constitute grounds for invalidating a decision of a company body.
A Shareholders’ Agreement should therefore be drafted so that its contractual effect, the company’s articles of association, and the corporate decision-making framework are properly coordinated.
2. The Agreement and a New Shareholder
Another important issue concerns the transfer of shares.
Under the statutory model, rights and obligations arising from a Shareholders’ Agreement do not automatically transfer to a new purchaser merely because that person acquires a share. An appropriate legal mechanism must be created in advance for that result to occur.
In practice, this may become critical where existing shareholders have operated for years under certain agreed rules but one of them transfers their share to a third party.
If the position of the new shareholder has not been considered in advance, a change in ownership may fundamentally alter the contractual balance previously established between the shareholders.
III. Shareholders’ Agreement and Articles of Association – Why Is the Distinction Important?
A Shareholders’ Agreement and the articles of association perform different legal functions.
The articles of association regulate important aspects of the company’s corporate structure and form part of its founding documentation. A Shareholders’ Agreement, on the other hand, creates an additional contractual relationship between the persons who are parties to it.
The current law itself distinguishes between these instruments: where a Shareholders’ Agreement exists, the articles of association must contain information about the existence of the agreement. This does not mean that the entire contents of the Shareholders’ Agreement must be incorporated into the articles of association.
1. The Same Issue May Require Regulation in Both Documents
In practice, certain commercial arrangements between shareholders may not be sufficient by themselves and may also require corresponding regulation in the company’s articles of association.
For this reason, professional drafting of a Shareholders’ Agreement is not limited to preparing the text of a standalone contract. The lawyer should review the existing articles of association and determine whether inconsistent regulation in the two documents may create future conflict.
Where the company’s articles of association also require tailored revision, the relevant corporate documents should be aligned as part of the same legal structure.
2. Confidential Commercial Arrangements
Shareholders often have commercial arrangements that may not be appropriate to describe in full detail in the company’s public corporate documents.
For example, their relationship may be based on different economic expectations, future investment obligations, particular forms of involvement in the business, or agreed conditions for exit.
The appropriate legal form for such matters depends on the particular circumstances, and this is where a separate Shareholders’ Agreement becomes particularly valuable.
IV. Decision-Making and the Balance of Power Between Shareholders
One of the most common issues in businesses with several shareholders is decision-making on important matters.
In one company, a single shareholder may exercise control. In another, ownership may be divided equally. In a third, important strategic decisions may be practically impossible without the consent of several shareholders.
When drafting a Shareholders’ Agreement, it is important to assess not only the percentage holdings, but also how the particular ownership structure will operate in a real conflict situation.
1. The Risk of a 50/50 Ownership Structure
A 50/50 ownership structure may appear balanced, but disagreement between shareholders may significantly hinder the company’s ability to make decisions.
A good example is the Supreme Court of Georgia’s Case No. ას-441-2022, which concerned the relationship between two 50% shareholders and a long-running corporate dispute involving the expulsion of one of them.
The Court also considered difficulties in decision-making associated with equal participation, and the circumstances of the dispute demonstrate how serious the consequences of an established shareholder conflict can become.
A Shareholders’ Agreement is one mechanism through which such risks can be considered in advance, although the specific solution should always be tailored to the company, its ownership structure, and the interests of its shareholders.
2. Majority and Minority Shareholders
A different type of risk arises where one shareholder or group of shareholders holds a substantial majority.
In that situation, the key issue may not be deadlock, but rather whether majority control is appropriately balanced against the economic interests of the minority shareholder.
When designing the agreement, it is therefore necessary to identify the matters on which shareholders may develop conflicting interests and determine whether the existing legal structure reflects their actual commercial understanding.
V. Information Exchange Between Shareholders
One of the first signs of a breakdown in trust between shareholders is often a conflict concerning access to financial and corporate information.
A shareholder may have a statutory right to information, yet disputes may still arise regarding which documents must be provided, in what form, within what period, or in what circumstances the company may refuse disclosure.
Article 146 of the current law requires the management body of an LLC, upon a shareholder’s request and within a reasonable period, to provide information about the company’s activities and allow access to business documentation. Refusal requires an appropriate legal basis and written justification.
1. Why Is the General Statutory Rule Not Always Enough?
The Supreme Court of Georgia’s Case No. ას-205-2023 concerned a dispute in which a shareholder sought access to various corporate documents while the directors avoided providing them.
The Supreme Court emphasised the importance of the shareholder’s right to information and ability to exercise control over the company’s activities.
The case illustrates the practical problem: once relations between shareholders deteriorate, even the exercise of a general statutory right may become the subject of litigation.
2. Additional Contractual Rules
A Shareholders’ Agreement may be used to make the practical exchange of information between shareholders more predictable.
However, there is no universal answer regarding what information should be provided periodically, who should prepare the relevant reports, what should remain confidential, or what additional reporting requirements are reasonable for a particular business.
These issues should be tailored to the company’s activities, the role of each shareholder, and the need to protect confidential information.
VI. Business Financing and the Economic Obligations of Shareholders
A company often requires additional capital after the business has commenced operations.
Problems arise where the shareholders originally agreed only on their initial investment and it later becomes unclear who should finance expansion, in what amount, and through what legal mechanism.
A Shareholders’ Agreement may be important for establishing general principles governing future financing.
1. Shareholders with Different Financial Capacity
Shareholders holding equal interests do not always have equal financial capacity.
If the company requires substantial additional resources and only one shareholder is able to provide them, this may later become a source of both economic conflict and disagreement over control.
For this reason, possible financing scenarios should be considered in advance when structuring the relationship between shareholders, while the specific financial and corporate mechanism should be tailored individually.
2. Financing and the Ownership Balance
Poorly structured additional financing may significantly alter the original economic balance between shareholders.
For this reason, drafting a Shareholders’ Agreement should be based on a combined assessment of the company’s capital structure, articles of association, and future investment plans.
VII. Profit Distribution and Dividend Expectations
One of the most important economic expectations of shareholders is the ability to receive profits from the business.
However, shareholders may disagree as to whether profits should remain in the company to finance future growth, when distribution is appropriate, or how the parties should act if the company’s future investment needs change.
A Shareholders’ Agreement allows the shareholders to address such economic expectations in advance to the extent permitted by applicable law.
1. Dividend Disputes in Practice
The Supreme Court of Georgia’s Case No. ას-1546-2023 concerned a dispute relating to a dividend claim and demonstrates that profit distribution may itself become the subject of separate court proceedings.
Among other matters, the Court considered the creation of the dividend claim and the significance of the shareholders’ meeting resolution.
Once litigation has begun, it becomes necessary to determine what decision was adopted, who held the relevant claim, and what economic result should have followed.
2. Defining Expectations in Advance
In a business with several shareholders, it is therefore useful for the shareholders, while relations remain cooperative, to understand their respective positions on reinvestment and profit distribution.
Here too, the specific provisions of a Shareholders’ Agreement will depend on the company’s financial model, growth plans, investment requirements, and the shareholders’ economic interests.
VIII. Share Transfers and the Entry of a New Shareholder
One of the most important moments in the life of a company occurs when one shareholder decides to sell their share.
For the remaining shareholders, the identity of the new co-owner may be just as important as the economic value of the share.
For this reason, drafting a Shareholders’ Agreement requires particular attention to possible future changes in ownership.
1. Risk of a Third Party Entering the Company
Where the relationship was originally based on personal trust, professional expertise, or active participation of specific individuals, replacing one shareholder may affect the entire business dynamic.
Assessing only whether the transfer of the share can legally be registered is not sufficient.
It is also necessary to consider how the share transfer, the company’s articles of association, and the existing Shareholders’ Agreement should interact.
2. Application of the Agreement to a New Shareholder
As noted above, under the current law, rights and obligations arising from a Shareholders’ Agreement do not automatically transfer to a purchaser of the share.
This issue is particularly important when planning a business sale or the entry of a new investor.
The documentation should be structured from the outset so that a change in ownership does not unintentionally destroy the contractual framework on which the shareholders’ relationship was based.
A change in ownership may also require registration of corporate changes.
IX. Active Participation of a Shareholder in the Business
A shareholder is not always merely an investor.
Companies are often founded on the basis that one person contributes financial resources, another manages operations, and a third contributes professional expertise, clients, or technology.
Where such personal involvement forms part of the economic basis of the relationship, its termination may be as significant to the business as the loss of capital.
1. The Roles of Shareholder and Director Must Be Distinguished
It is particularly important to distinguish the status of shareholder from that of director.
A shareholder may also serve as director, but the rights and obligations arising from these two roles are not identical.
The director’s powers and fiduciary duties should therefore be analysed separately from the contractual relationship between shareholders.
2. What Happens If a Shareholder Stops Participating in the Business?
Where active participation by a shareholder was an essential element of the relationship, the parties should consider in advance what happens if that involvement ends.
However, imposing the same consequence in every business would be inappropriate.
For this reason, a Shareholders’ Agreement requires not merely legal drafting but detailed analysis of the shareholders’ actual commercial relationship.
X. Deadlock – When Shareholders Cannot Agree on an Important Issue
Deadlock is a situation in which disagreement between shareholders prevents or makes it impossible for the company to adopt an important decision.
It is particularly common in companies with equal ownership, although it may also arise in other structures where major decisions require the support of several shareholders.
As the Supreme Court’s Case No. ას-441-2022 demonstrates, a serious 50/50 conflict may develop into complex corporate litigation lasting for years.
1. The Problem Is Not Merely the Number of Votes
A deadlock may arise from different views on business development, financing, the director, sale of assets, or another strategic matter.
Simply stating that “the shareholders have equal rights” does not solve this problem.
2. Advance Legal Planning
A well-drafted Shareholders’ Agreement should also address possible crises in the shareholders’ relationship.
However, the form of a deadlock mechanism is one of the most sensitive aspects of the agreement, and mechanically copying one from another contract may be particularly risky.
An unsuitable mechanism may in practice make one shareholder dependent on another or place one party in an economically unequal position.
XI. Shareholder Exit and the Future of the Business
Every business relationship between shareholders may eventually come to an end.
A shareholder may wish to move into another business, realise the value of an investment, end cooperation with another shareholder, or sell the entire company.
If such scenarios are not considered at all, termination of the relationship may threaten the continued existence of the business itself.
1. Exiting the Business Is Not Merely Selling a Share
When drafting a Shareholders’ Agreement, an exit scenario may involve the value of the share, the identity of a potential purchaser, the interests of the remaining shareholders, the company’s solvency, and many other factors.
A general provision stating only that “the shareholder may sell their share” is often insufficient for a complex ownership structure.
2. Planning for a Future Transaction
If the shareholders’ common objective is eventually to sell the business to an investor or strategic purchaser, the Shareholders’ Agreement should be compatible with that objective.
The protection mechanisms created today should not themselves prevent a future transaction.
XII. Confidentiality and Conflicts of Interest Between Shareholders
A shareholder may have access to important business information: customer databases, pricing, suppliers, business plans, technology, financial information, and commercial strategy.
If relations deteriorate or a shareholder becomes involved in another business, use of such information may create an independent risk.
1. Confidential Information
A Shareholders’ Agreement may establish an additional contractual framework for protecting information between shareholders.
However, it is necessary to define appropriately what information is protected in the particular business and what obligations may be legally justified.
Overly general provisions often provide little practical protection.
2. Competing Interests
The situation becomes particularly complex where a shareholder simultaneously conducts another business or uses a business opportunity connected with the company for personal benefit.
Such circumstances require consideration of the contractual relationship as well as applicable corporate and competition law requirements.
Accordingly, copying a universal “non-compete” clause is not a substitute for professional legal analysis.
XIII. Breach of a Shareholders’ Agreement
A Shareholders’ Agreement is effective only if the document addresses not only the parties’ intended relationship but also the legal consequences of a potential breach.
This issue is particularly important because, as the current law expressly provides, breach of a Shareholders’ Agreement does not by itself invalidate a decision of a company body.
1. Difference Between Contractual and Corporate Consequences
A shareholder may breach a contractual obligation owed to another shareholder while the relevant corporate resolution remains legally effective.
The effectiveness of the agreement therefore depends significantly on whether contractual and corporate consequences are properly distinguished.
This is a technical legal issue and one of the reasons why a Shareholders’ Agreement should not be prepared merely by using a foreign or internet template.
2. Planning Dispute Resolution
Shareholders should also consider how disputes between them will be resolved.
The appropriate mechanism depends on the scale of the company’s activities, the location of the shareholders, other contractual terms, and the likely need to enforce a future decision.
Dispute resolution arrangements therefore also require an individual legal assessment.
XIV. When Should a Shareholders’ Agreement Be Prepared?
Ideally, a Shareholders’ Agreement should be prepared before a conflict arises between shareholders.
At the beginning of the relationship, the parties are generally more willing to discuss difficult issues, and it is significantly easier to agree in advance on possible future scenarios.
1. When Establishing the Company
At the incorporation stage, the articles of association, ownership structure, and additional agreement between the shareholders can be designed together as one coherent framework.
2. When a New Shareholder or Investor Enters
The entry of a new shareholder or investor into an existing business is another important stage at which a Shareholders’ Agreement should be prepared or an existing agreement reviewed.
A new investor changes the existing balance of ownership, power, and economic interests.
3. At the First Signs of a Problem
Where disagreements have already begun to arise but cooperation remains possible, restructuring the legal relationship may sometimes offer an alternative to litigation.
At that stage, however, particular care is required because every new provision must be assessed in the context of the existing conflict.
XV. TB Legal’s Process for Drafting a Shareholders’ Agreement
Within its corporate law practice, TB Legal begins drafting a Shareholders’ Agreement not with a ready-made template but with an assessment of the company and the relationship between its shareholders.
The objective of the service is to identify potential legal problems and structure the parties’ commercial understanding so that it is compatible with the particular business model.
1. Assessment of the Existing Corporate Position
The first stage involves reviewing the company’s ownership structure, existing articles of association, registered corporate information, and any existing agreements.
In an operating company, it may also be necessary to assess whether the company’s broader legal or corporate structure requires revision.
2. Analysis of the Shareholders’ Business Interests
The next stage is to determine what each shareholder actually expects from the business and where their interests may diverge.
This is the stage at which the issues requiring regulation in the particular Shareholders’ Agreement are identified.
3. Tailored Drafting of the Document
The legal structure is developed with reference to the risks that are relevant to the particular company.
TB Legal’s approach is not to include the maximum possible number of standard clauses. The objective is to ensure that the agreement addresses the real issues of the shareholder relationship and is compatible with applicable law, the articles of association, and the company’s future plans.
4. Alignment with Other Corporate Documents
Finally, it is assessed whether corresponding amendments are required to the articles of association, corporate resolutions, or registered information.
This stage is particularly important because a Shareholders’ Agreement is a separate contract and its provisions cannot automatically amend the company’s articles of association or the corporate information recorded in the registry.
XVI. Why Should a Shareholders’ Agreement Not Be a Standard Template?
Conflicts between shareholders often arise not because the parties had no agreement at all, but because they had different understandings of what their relationship would mean in a real situation.
A 50/50 ownership structure may operate perfectly while relations are good, but may block decision-making when disagreement arises. A majority shareholder may manage the business efficiently while the minority shareholder begins to face problems concerning information and control. Different expectations regarding profit may lead to a dividend dispute. The exit of one shareholder may fundamentally change the company’s ownership and governance structure.
Supreme Court case law demonstrates that these conflicts are not merely theoretical risks. Courts deal with shareholder expulsion, access to information, dividends, director conduct, and other complex corporate disputes.
A Shareholders’ Agreement cannot eliminate every future dispute. Its purpose is to ensure that, before problems arise, the shareholders define the commercial and legal rules that are important to them and reduce the number of issues that must first be decided during a crisis.
For this purpose, simply using an online Shareholders’ Agreement template or copying another company’s agreement is not sufficient. Each important provision should be assessed in light of the specific ownership structure, the shareholders’ interests, the company’s articles of association, and Georgian law.
If you want to regulate the relationship between shareholders in advance or review an existing agreement, you can contact TB Legal for legal advice. TB Legal assesses both the parties’ commercial objectives and the company’s existing corporate structure and potential legal risks when drafting a Shareholders’ Agreement.
