SHELTONS INTERNATIONAL GROUP
In Maltese private company practice, the relationship between shareholders is often regulated through both the company’s memorandum and articles of association and a separate shareholders’ agreement. Although these instruments may overlap in matters relating to governance, decision-making and shareholder protections, they do not operate on the same legal plane. That distinction becomes material where the two are inconsistent, since it is in that context that the question of legal priority arises.
The constitutional documents regulating the company
The memorandum and articles of association – these are the company’s constitutive documents. Upon registration of the company with the Malta Business Registry, they frame the company’s legal identity and regulate matters such as its objects, capital structure, internal governance and the powers vested in its organs. As documents recognised by company law and available on the public register, they also serve as the principal point of reference for persons dealing with the company externally.
The shareholders’ agreement – this instrument is typically used to regulate matters which the parties wish to address in a more tailored or commercially sensitive manner than would ordinarily be appropriate for inclusion in the constitutional documents. Typical examples include reserved matters, board nomination rights, transfer controls, funding obligations, and agreed exit routes.
A shareholders’ agreement therefore commonly addresses matters which would otherwise remain outside, or be dealt with only at a high level, in the memorandum and articles of association. Its practical importance should not, however, be mistaken for constitutional force. As a matter of Maltese law, a shareholders’ agreement remains, in principle, contractual in nature and binds the parties to it on an inter partes basis. It does not, merely because it exists, amend the memorandum and articles of association or displace the corporate framework established under the company’s registered constitutional documents.
What happens in the event of conflict?
Where inconsistency arises between the constitutional documents and a shareholders’ agreement, the validity of the relevant corporate act will ordinarily fall to be assessed by reference to the memorandum and articles of association. It follows that a resolution or decision properly adopted in accordance with those constitutional documents will generally remain effective, even if the same conduct amounts to a breach of the shareholders’ agreement.
In practice, the aggrieved party’s recourse will usually sound in contract rather than in the invalidation of the corporate act itself. The breach may therefore give rise to contractual remedies between the relevant parties, but will not ordinarily, without further basis, undo corporate action which is otherwise valid under the company’s memorandum and articles of association.
Practical drafting considerations
From a transactional and drafting perspective, the key point is that the two instruments should be prepared so as to operate coherently alongside one another. Any provision intended to affect the company’s governance framework at a constitutional level, to support its formal decision-making architecture, or to bind incoming shareholders should generally be mirrored in, or
otherwise properly reflected by, the memorandum and articles of association rather than left to subsist solely on a contractual basis.
Matters commonly reflected in the memorandum and articles of association include:
■ reserved matters and veto rights,
■ board composition and director appointment rights,
■ share transfer restrictions and pre-emption mechanics,
■ quorum and voting thresholds for key decisions, and
■ any other provisions which are intended to bind future shareholders as a matter of company law.
By contrast, provisions which are principally concerned with regulating the shareholders’ relationship amongst themselves, especially where confidentiality or commercial sensitivity is relevant, may be better confined to the shareholders’ agreement. Matters more appropriately addressed in a shareholders’ agreement often include:
■ confidentiality obligations,
■ dividend policy understandings,
■ shareholder funding arrangements,
■ deadlock mechanisms, and
■ more detailed transfer and exit provisions, including tag-along and drag-along rights.
It is also relatively common for shareholders’ agreements to include language stating that the agreement is to prevail in the event of conflict with the memorandum and articles of association. Such wording may have contractual significance as between the parties, including by obliging them to take remedial action or procure amendments to the constitutional documents. It does not, however, of itself alter the company’s memorandum and articles of association, which continue to regulate the validity of corporate acts unless and until they are formally amended in accordance with the Companies Act (Chapter 386 of the Laws of Malta). Moreover, it is important to note that an incoming shareholder does not, merely by becoming a member of the company, become bound by an existing shareholders’ agreement. Accordingly, where continued adherence to the shareholders’ agreement is intended, appropriate accession provisions should be incorporated into the relevant share transfer documentation.
A shareholders’ agreement should generally be treated as a supplemental instrument rather than a substitute for the memorandum and articles of association. When both documents are carefully coordinated, they can together produce a governance framework that is legally robust, commercially practical and appropriately calibrated to the needs of the relevant shareholders under Maltese law.
The information provided in this article is for general informational purposes only and does not constitute legal, financial or professional advice. While every effort has been made to ensure accuracy, readers should seek specific advice before taking or refraining from taking any action on the basis of this content.
