The Shareholders’ Agreement in the OHADA Uniform Act: An Underutilized Innovation
By Jacob A. Akuo, Esq., Co-founding partner
The OHADA Uniform Act on Commercial Companies and Economic Interest Groups (the Uniform Act) is the main law that governs companies in Cameroon. It equally applies to 16 other Member States of the Organization for the Harmonization of Business Laws in Africa (Organisation pour l’harmonisation en Afrique du droit des affaires popularly known by its French acronym OHADA). It is one of the multiple Uniform Acts that enact business laws within the OHADA Member States.
It first came into force on the 17th of April 1997 and was revised and adopted on January 30, 2014, in Ouagadougou. The revised Uniform Act ushered in several innovations the most prominent of which include the creation of a new type of limited company (simplified public limited company popularly known by its French acronym SAS), creation of preference shares, the free allocation of shares to employees, shareholders’ agreement (to be discussed below), and finally the recognition of the possibility for companies to issue complex securities (a topic for another paper).
The Uniform Act is a detailed and comprehensive text that has led legal practitioners to observe that there is little need to draw up exhaustive articles of association to bind the shareholders to the company. In addition to that observation is the fact that most of the provisions of the Uniform Act are mandatory. In other words, the articles of association cannot derogate or override any provision in the Uniform Act unless the Act expressly authorizes the sole shareholder or shareholders either to substitute the provisions of the articles of association with the provisions of the Uniform Act, or to supplement the provisions of the Uniform Act with the provisions of the articles of association.
However, no matter how comprehensive the text is, there is always a need for shareholders to devise bespoke ways to govern their relationship as joint owners of a business. Before its introduction in the 2014 amendment, shareholders and the company were strictly bound by the articles of association and the Uniform Act per se.
What is a shareholders’ agreement as per the Uniform Act?
The Uniform Act does not provide an express definition of a shareholders’ agreement. As a matter of fact, the Uniform Act only has one provision exclusively dedicated to what amounts to a shareholders’ agreement and its scope. Article 2-1 of the Uniform Act provides for a shareholders’ agreement as follows:
“Subject to compliance with the provisions of this Uniform Act and of the provisions of the articles of association which they cannot override, members may enter into agreements, other than the articles of association, in order to organize, among other things, on terms they have freely determined:
– relations between members;
– structure of governing body;
– conduct of the affairs of the company;
– access to stated capital;
– transfer of securities.”
One can infer the definition of a shareholders’ agreement as an agreement (other than the articles of association) entered into by shareholders on terms freely determined by them to organize among other things relations between them, conduct of the affairs of the company, access to stated capital and transfer of securities. The definition as inferred is pretty much in line with the law and practice that one may find in various jurisdictions around the world.
As a matter of comparative law, shareholders’ agreements are referred to in France as “pactes d’actionnaires” (contrary to the chosen term of art, “conventions extrastatutaires” in the OHADA Uniform Act). It is worthy of note that under the major legal traditions of the world, the doctrine of privity of contract as well as the principle of the relativity of the effects of a contract, in principle, agreements can produce rights and obligations for contracting parties alone and not third parties. These principles are underpinned by the requirement of consent or agreement in the law of contract.
Besides the definition, it is also clear from the provision that parties to a shareholders’ agreement cannot use it to disregard mandatory provisions of the Uniform Act and other provisions of the articles of association which are not overridable.
Moreover, a shareholders’ agreement is not the articles of association as many laypersons turn to sometimes conflate. On the one hand, the articles of association is an obligatory agreement (yes agreement) that must be entered into and signed by all the shareholders to the company before a notary public prior to the registration of the company. As a matter of law, it is one of the documentary requirements of the dossier that constitutes an application for registration of a company. The Uniform Act in article 10 et seq. plainly defines its form and content which drafters/shareholders must pay meticulous reverence to under pain of inadmissibility. Also, its amendment no matter the company form can only be done following a decision by an extraordinary meeting of shareholders (supermajority) and such an amendment must be notarized and filed at the companies registry (accessible to the public).
On the other hand, a shareholders’ agreement is a mere contract governed by ordinary rules of contract in addition to the Uniform Act. Its content or form is not dictated by the Uniform Act. That is to say, it has an unlimited scope even though its clauses cannot override the Uniform Act and the articles of association. It is a mere optional agreement which can be entered into by all or some of the shareholders at their behest. Contrary to the articles of association, it is not a requirement for incorporation and thus need not be made public through filing at the companies’ registry. To wit, it can be kept confidential by the shareholders who sign it. Lastly, notarization or authentication is similarly an option not a requirement for a shareholders’ agreement, in stark contrast with the articles of association.
What are some of the perks of a shareholders’ agreement under the Uniform Act?
One of such perks is that the list of issues that parties can include into the agreement are not exhaustive insofar as they do not override the mandatory provisions of the articles of association and the Uniform Act.
Secondly, this agreement can be entered into by all the shareholders or a limited number of shareholders with common interests. In so doing, they can draw up bespoke terms in a binding agreement (outside the scope of the articles of association) that cater to their individual and collective needs. A limited number of shareholders can use it to strengthen their hand during negotiations with other shareholders on the direction the company should take on various issues. This is especially pertinent at the moment with the introduction of different category of shareholders (preferred shareholders and equity shareholders). Assigned with differing rights and interests, shareholders in a particular category may enter into a shareholders’ agreement to cater to their specific needs.
Thirdly, as suggested in article 2-1 of the Uniform Act, when entered into by all shareholders, it can be used to tackle hot button corporate policy issues such as management and corporate governance, transfer of shares and securities, conduct of the affairs of the company, access to stated capital, etc. Regarding corporate governance for example, appointment and removal of directors/managers can be done in ordinary meetings of shareholders where the quorum is usually a simple majority. The articles of association may not be enough to stop majority shareholders from appointing or removing directors/managers at their whims and caprices. However, a shareholders’ agreement may pre-empt this by putting in place more rigorous rules for such an appointment or a removal.
Fourthly, when entered into by all the shareholders, a shareholders’ agreement can prove to be a very flexible approach to set corporate policy. A good example may relate to other hot button issues such as allocation of dividends or profits for shares or equity interests, allocation of reserves, and amounts to be carried forward. Presume conditions for going about same are purely contained in the articles of association (which is often the case). Changing or modifying them shall require respecting the arduous and expensive procedure for amendment of the articles of association such as holding an extraordinary meeting to take a decision (supermajority); notarization of the resolution; amendment of the articles of association and notarization thereof; and filing same at the companies registry for update of corporate information. By contrast, the shareholders’ agreement is not legally required by the Uniform Act to systematically go through all these exasperating modification formalities to be valid. In line with ordinary law of contract, shareholders can simply amend the agreement in accordance with the proviso on amendment as contained in the agreement per se.
In addition, a shareholders’ agreement can be used to pre-empt or resolve disputes and disagreements between the shareholders who are a party to it. Granted the articles of association are also meant to fulfil the same purpose, but the shareholders’ agreement is an added layer of pre-emption. Besides, it may contain a dispute settlement clause that maps out how such disputes can be settled including choice of alternative dispute settlement and a forum to resolve such disputes. It can be used as a mechanism to resolve disputes that have arisen in the course of the life of the company which are within the ambit of the shareholders’ agreement.
Furthermore, the agreement can be used by minority shareholders to take a common position to counter the majority shareholders especially during shareholders’ meetings or even in the summoning of such meetings. Granted the article 130 of the Uniform Act renders null and void all abusive decisions (decisions passed by the majority for their own benefit, contrary to the interest of the minority and without the decision being justified by the interests of the company), and minorities can sue and claim damages. Nevertheless, the clause is thin on specifics thus leaving the provision obscure.
As regards the summoning of meetings, minority shareholders may need this agreement to band together to get to the quorum required to summon a shareholders meeting. For instance, in a private limited company, the Uniform Act provides in article 337 that a minority of shareholders representing at least a quarter of the shareholders or equity interest may call a meeting. This quorum can easily be attained by minority shareholders entering into an agreement to reach this threshold or even surpass same to enable them summon meetings when their interest or that of the company is at stake. Although the law equally empowers a single shareholder to seize the court to appoint an agent who can summon such meetings, following this route is obviously complex, time-consuming and expensive.
Finally, it can be used to map out how dividends of the company shall be distributed. The Uniform Act contain certain rules of dividend distributions but elects not to take an exhaustive approach to this issue. Shareholders may elect to do that in the articles of association or in a shareholders’ agreement. But as earlier pointed out, choosing the articles may stifle flexibility.
What types of different shareholders’ agreements exists?
Under the Uniform Act, there is no express identification of different types of shareholders’ agreements. As a matter of fact, what amounts to a shareholders’ agreement is provided for only in one article of the Uniform Act. Nonetheless, it can be suitably classified into three main types based on corporate practice: minority or equal shareholders’ agreement, majority shareholders’ agreement, and shareholders agreement by and for all shareholders.
Minority or equal shareholders’ agreement is entered into with the minority shareholders of a company, or an equal half of the shareholders (50 percent). As a matter of law, shareholders are considered a minority when their collective equity interests or shares make up less than 50 percent of the shares of the company as per the Uniform Act.
As earlier mentioned, they are particularly exposed and require this agreement in order to team up to rival majority shareholders to protect their interests and that of the company itself. This agreement may particularly come in handy when it is a company with few shareholders whereby the majority may be one or more shareholders making all the decisions.
As has been previously underscored, even though they are protected under article 130 of the Uniform Act from abusive decisions by the majority, the inadequate provision of this clause leaves a lot of obscurity that can be exploited by a sharp-witted majority.
On the other hand, the Uniform Act in article 131 also forbids the minority from undue use of minority power through voting to prevent decisions taken for the interest of the company without any demonstrable legitimate ground.
Consequently, a minority shareholders’ agreement should take into consideration the legitimate interest of the company. Failing this, the law empowers the majority to seize the court and request for the appointment of an ad hoc agent who shall represent the minority during meetings and exercise their vote.
Majority Shareholders’ agreement in contrast is designed to regulate the relationship between majority shareholders. Majority according to the Uniform Act is any shareholder or shareholders who own over 50 percent of the company’s equity interests or shares.
An interesting example to consider would be in the case of a public limited company managed by a board of directors. Article 417 of the Uniform Act provides that the articles of association may require the directors on the board to be shareholders of the company. In a case where the majority is not in direct control of the board, they may cut a deal (in the form of a shareholders’ agreement) to rein in the powers of the shareholders who have control of the board.
Yet again, article 130 of the Uniform Act forbids the majority from taking abusive decisions against the minority. Those decisions are null and void ab initio as per this article, and the minority may sue to claim for damages. Following this sequence, a shareholders’ agreement between the majority that sets out terms to disenfranchise, subjugate or take abusive decisions specifically targeting the minority shareholders and at the expense of the legitimate interest of the company is null and void ab initio. In addition, in the Anglophone part of Cameroon where common law applies, parties can rely on the “fraud on the minority” exception to the rule in the case of Foss v Harbottle ((1843) 2 Hare 461, 67 ER 189 when making their case before a judge.
A shareholders’ agreement by and for all shareholders is another type of shareholders’ agreement. As the name suggests, it is entered into by all the shareholders and may contain clauses that protect both minorities and majority interests. It takes painstaking negotiations since the interests of parties may not be completely aligned. But it is nevertheless important as an added layer to the articles of association to take care of hot button issues between the shareholders. Shareholders can use this opportunity to create bespoke terms on issues such as allocation and distribution of dividends, reserves, management structure, and all other issues that if put in the articles of association, may stifle flexibility.
In conclusion, a shareholders’ agreement is an extremely important tool that can be used by shareholders to a company to effectively run it whilst protecting their respective interests. The flexibility it brings to the table in contrast with the articles of association in addition to its ability to pre-empt or resolve disputes between shareholders make up some of its intrinsic characteristics that can be exploited by shareholders in Cameroon and the OHADA Member States to better run the affairs of the company.
Dayspring Law Firm is the leading corporate law firm in the CEMAC Region. We advise clients on various aspects of corporate law ranging from incorporation, corporate governance, corporate restructuring, mergers and acquisitions, demergers, liquidation and winding up, etc.