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Corporate legal relations in the Republic of Armenia are primarily governed by the Law of the Republic of Armenia on Joint-Stock Companies, Chapter 5 (“Legal Entities”) of the Civil Code of the Republic of Armenia, and other applicable normative legal acts.
One of the key instruments regulating relations among shareholders is the Shareholders’ Agreement (SHA). An SHA is a private contractual arrangement that establishes rights and obligations among its parties and supplements the company’s charter.
Shareholders’ Agreements were formally introduced into Armenian corporate legislation on 19 April 2019 through amendments to the Law on Joint-Stock Companies. Under Armenian law, an SHA may be concluded between shareholders, between shareholders and the company, and may also include prospective shareholders who subscribe to the company’s shares.
Unlike a company’s charter, an SHA is not subject to public disclosure and remains confidential. This allows the parties to regulate sensitive commercial matters and personal data without public exposure. At the same time, an SHA may regulate matters that are either insufficiently addressed or not regulated at all by the charter, provided that it does not contradict mandatory provisions or the charter itself.
Another distinguishing feature of the SHA is its flexibility, as amendments do not require compliance with formal statutory procedures.
Although shareholders’ agreements have been applied in practice in Armenia for approximately seven years, Armenian case law has not yet developed a substantial body of landmark judicial decisions addressing fundamental issues relating to such agreements.
This raises the question of whether a shareholders’ agreement constitutes a civil-law contract, thereby falling within the definition of a contract under Article 436 of the Civil Code of the Republic of Armenia and subject to general contractual principles. Such classification would imply the applicability of mechanisms securing performance, civil-law liability for breach, and the creditor’s right to claim damages arising directly from non-performance.
Alternatively, the question arises whether a shareholders’ agreement should be regarded as a corporate-law transaction, which would suggest that, in cases of non-performance, the breaching party may not be subject to adverse legal consequences.
This article addresses several interrelated issues, including the structure of a shareholders’ agreement, its legal nature (civil-law versus corporate-law), mechanisms for securing performance of obligations assumed under the agreement, and the procedure for its amendment.
Structure of a Shareholders’ Agreement
A shareholders’ agreement typically defines the rights and obligations of shareholders and establishes rules concerning the sale of shares, the company’s operations, and decision-making processes. Its primary purpose is to enable shareholders to regulate and organize specific internal relationships among themselves.
A shareholders’ agreement may include various contractual rights, including the right of first refusal, pre-emptive rights, piggyback rights as well as put/call option rights.
- Right of First Refusal (ROFR)
The right of first refusal requires a shareholder intending to sell their shares to first offer them to existing shareholders or to the company. This mechanism enables shareholders to control the composition of the shareholder base and serves as a reasonable means of preventing the transfer of shares to competitors, provided that it does not impose excessive burdens or delays.
The right of first refusal may take two forms: hard and soft.
A Hard ROFR requires the selling shareholder to obtain a bona fide offer from a third party prior to offering the shares to existing shareholders. By contrast, a Soft ROFR allows the selling shareholder to first offer the shares to existing shareholders and, if the shares are not purchased, to sell them to a third party on the same or more favorable terms.
Hard ROFR provisions may complicate the sale of shares, as potential third-party investors may withdraw from the transaction. Soft ROFR provisions are less restrictive and provide greater flexibility, as they apply prior to identifying a third-party buyer. Accordingly, where a right of first refusal is included in a shareholders’ agreement, the soft variant generally offers a more balanced approach.
- Pre-emptive Rights
Pre-emptive rights allow shareholders to participate in future financing rounds and are commonly included in early-stage shareholders’ agreements. These rights enable existing shareholders to acquire newly issued shares and protect their ownership interests against dilution.
While pre-emptive rights may serve the interests of shareholders, they may also hinder a company’s ability to attract external investment. The participation of non-professional investors in financing rounds may complicate the establishment of an ownership structure that is attractive to venture capital investors, potentially limiting the company’s growth prospects.
- Piggyback Rights
Piggyback rights require a selling shareholder to allow other shareholders to sell their shares proportionally alongside the shares offered for sale. One drawback of piggyback rights is that they may delay potential transactions, as they require advance notice to other shareholders and the identification of a purchaser willing to acquire shares from multiple sellers.
Piggyback rights are typically structured as tag-along or drag-along rights.
Tag-along rights allow minority shareholders to participate in a sale initiated by a majority shareholder by selling their shares to third parties on the same terms.
Drag-along rights allow majority shareholders to compel minority shareholders to sell their shares simultaneously to a third party, thereby ensuring the completion of the transaction.
- Call/Put option Rights
In the context of shareholders’ agreements, call and put options function as contractual exit mechanisms rather than financial derivatives.
A call option grants one party—typically a promoter or majority shareholder—the right to purchase the shares of another shareholder under predefined conditions. The primary objectives of a call option include consolidation of control, facilitation of minority exits after a specified period, and protection against undesirable shareholders.
A put option grants one party—typically an investor or minority shareholder—the right to sell their shares to another shareholder. Its purpose is to provide an exit mechanism, protect minority shareholders, and mitigate investment risk.
Enforcement of Obligations under a Shareholders’ Agreement
Pursuant to Part 6 of Article 38.1 of the Law, a shareholders’ agreement may provide mechanisms to secure performance of obligations arising from the agreement, as well as civil-law liability measures for non-performance or improper performance.
The explicit reference to civil-law liability confirms the civil-law nature of the shareholders’ agreement. Furthermore, Article 368(1) of the Civil Code establishes permissible methods for securing the performance of obligations, while Article 348 prohibits unilateral refusal to perform contractual obligations.
Accordingly, the question arises whether a shareholder who has assumed an obligation to participate in the company under a shareholders’ agreement may unilaterally withdraw by failing to perform such obligation. Such an outcome would undermine the legitimate expectations of shareholders who have duly performed their obligations and would result in adverse legal consequences for them.
Even in the absence of specific statutory enforcement mechanisms, shareholders may, at the negotiation stage, include contractual provisions that ensure proper performance. One such mechanism is the call option.
For example, where two shareholders hold 60% and 40% of the shares respectively, the agreement may provide that if the 40% shareholder fails to make the agreed investment within a specified period, the 60% shareholder acquires the right to purchase those shares for a nominal price (e.g., USD 1). In such a case, the exercising party issues a call option notice requiring the sale of the shares.
Amendment of a Shareholders’ Agreement
The parties to a shareholders’ agreement may amend it by mutual consent. Amendments do not require the execution of a new agreement; rather, the parties execute a deed of variation, which must be signed by all shareholders. Upon execution, the agreed amendments become an integral part of the shareholders’ agreement.
Conclusion
Despite the specific nature of its parties, a shareholders’ agreement under Armenian law constitutes a civil-law contract. Consequently, general contractual principles apply, including freedom of contract, enforceability of obligations, and liability for breach. No person may be compelled to become a party to a shareholders’ agreement or to assume obligations without their free and informed consent.
The precise position of the shareholders’ agreement within the Armenian legal system remains somewhat ambiguous. While it operates within the framework of corporate law, the Law of the Republic of Armenia on Joint-Stock Companies explicitly refers to the Civil Code (Article 38.1, Part 6), and corporate disputes arising from shareholders’ agreements are adjudicated within civil procedural proceedings.