The shareholders' agreement governs the relationship between the different sponsors of the project company. This would be important for the government if the government subscribes for equity in the project company. It is also relevant for the government if shares in the project company are assignable to the government, for instance in the event of default, or at the end of the concession period.
The sponsors of a project need to agree on the terms under which they will contribute to the project and the right and interests of the various stakeholders in the project. Usually a document setting out the respective responsibilities and involvement of the sponsors is agreed prior to submission by the consortium prior to the bid. This document is usually called a memorandum of understanding, a preliminary consortium agreement or a terms sheet. Such preliminary agreements are often the basis for a later detailed shareholders' agreement.
Key Issues
A shareholders' agreement would deal with the following:
• Share capital and shareholders' contribution. A shareholders' agreement normally begins with a description of the share capital structure of the project company. There is also likely to be a specific provision for the subscription of equity (and mechanics to deal with the closing). In addition, the agreement may specify further equity or capital commitment (in terms of the amount and form) from the shareholders, or specifically provide that there is no further equity or capital commitment.
• Board of directors. The shareholders' agreement should deal with the following issues:
o Appointment and removal. Usually, each shareholder is entitled to nominate a specified number of directors to the board of directors the project company. This number may change if the proportionate number of shares held by each shareholders change. In addition, the shareholders may agree to appoint an agreed number of "independent" directors who are not nominated by either one of the shareholders.
o Chairperson. Some issues are: how the chairperson is to be appointed, whether the chairperson will be rotated, who shall chair the meeting if the chairperson is not present, and whether the chairperson will have the casting vote.
o Executive and non-executive directors. The directors appointed may be executive directors (actively involved in the day-to-day management of the project company) or non-executive directors. Some important senior positions, for example the chief executive officer and the chief financial officer, may have the responsibilities and the process for appointment expressly set out.
o Meetings. This deals with the mechanics such as the number of times a year directors' meetings are held, the procedure for calling a meeting, required notice of a meeting, whether electronic meetings are possible and whether a resolution signed by all the directors is an acceptable alternative to a meeting (this also depends on the law of a jurisdiction).
o Quorum. This deals with the number of directors that must attend a directors' meeting in order for a resolution to be validly passed. It may provide that a certain type of director (for example a director nominated by a particular shareholder) need to attend for a meeting to be duly convened. The shareholders' agreement should also provide for what happens if a quorum is not met, and quorums for subsequent adjourned meetings.
o Duties. This discusses the directors' duties and provisions to deal with conflicts of interests (these matters are also provided for under the corporations law of the country). The directors may also be excused from certain duties (for example a director nominated by a particular shareholder will not be in breach of duty for considering the interest of that shareholder, although the extent to which such provision is enforceable will depend on the particular law of the country).
• Shareholders. A shareholders' meeting is also called a general meeting. A shareholders' agreement would deal with:
o Meetings. The mechanics such as the number of times a year a meeting is held, the procedure for calling a meeting and required notice of a meeting.
o Quorum. This deals with the number of shareholders (in absolute numbers or in percentage of shareholding terms) that must attend a shareholders' meeting in order for a shareholders' resolution to be validly passed. It may provide that a certain class of shareholder need to attend a meeting for it to be duly convened. The shareholders' agreement may also provide what happens if a quorum is not met, and quorums for subsequent meetings.
• Reserved matters. Some matters are important and need a special majority in order to be approved. These matters may require a special majority in a shareholders' meeting or a board of directors meeting.
• Continuing obligations. These are provisions in relation to business plans, budgets, commitments and milestones of the project company, also it may include provisions to provide specific information about the operation of the project to the shareholders.
• Protective covenants. The shareholders should not be able to engage in, or hold interests, that compete with or conflict with the interest or the business of the project company. This will apply for as long as the shareholder hold shares in the company but may apply for a specified period of time after the shareholder ceases to hold any shares. The period that is indefinite or unreasonably long, however, may not be enforceable because the courts could view it as an unreasonable restraint of trade.
• Transfers. For a project company in relation to PPP projects, there is usually a general restriction on the transfer of shares (at least for a period until the completion of the construction of the facility, but often for longer). Transfer provisions usually provide for:
o Permitted transfers. For example, transfers to subsidiaries, transfers subject to rights of first refusal by the other shareholders. It is important to ensure that this exception is carefully drafted, otherwise it could be used as a vehicle to circumvent transfer restrictions. Specifically, if an exception simply provides that a shareholder can transfer to its subsidiary, then the shareholder may transfer to a newly incorporated company and the transfer shares of the newly incorporated company to a third party to circumvent the transfer restrictions.
o Compulsory transfers. For example in the case of default or deadlock resolutions as required under the shareholders' agreement, and in the case of a drag along right.
o Drag along rights. This is the right of one shareholder to compel the other shareholders to sell their shares to a third party along with the first shareholder (almost certainly at a specified minimum price). This ensures that the shareholder with the drag along right is able to realise the investment by enabling the shareholder with the drag along rights to deliver to a potential buyer (who offers a reasonable price) the whole of the project company.
o Tag along rights. This is the right of one shareholder to compel another shareholder not to sell its shares to a third party unless the second shareholders purchases, or compel the third party to purchase also, the shares of the first shareholders. This ensures that the shareholder with the tag along rights is entitled to the benefits of any realisation of its investment in the project company, for example via a listing or a trade sale.
• Deadlock. A deadlock is said to occur after a repeated failure to pass a resolution at the board or shareholders' meeting level or a repeated failure to meet a quorum. The usual options for resolving a deadlock are:
o the chairperson's casting vote;
o an outsider's swing vote;
o escalation to the chairperson or chief executive of the shareholders; and
o reference to an expert or arbitration.
• Exit mechanisms. Some options are a transfer of shares, put/call option, Russian roulette, texas, shoot out, sealed bids, public offering (unusual) and liquidation.
• Compulsory transfers. The shareholders' agreement would provide for events that trigger the compulsory transfer of shares, this is usually the default or insolvency of a shareholder, or change of control of the shareholder. The compulsory transfer may occur at a "fair value" (with mechanisms to determine this fair value) if the shareholder is a "good leaver". Or the compulsory transfer may occur at no value or a discounted value (with mechanisms to determine this price) if the shareholder is a "bad leaver".