In this article, Managing Partner and Attorney Dr. Fahad Al-Shammari reviews the legal regulation of Shareholder Agreements and their binding force, and presents the practical steps required to ensure compliance with the provisions of Companies Law No. 1 of 2016.

Overview of Shareholder Agreements under Companies Law No. 1 of 2016 and Capital Markets Authority Law No. 7 of 2010

Shareholders and partners in any company are naturally concerned with the extent of their influence and control over corporate decisions and management in proportion to their ownership interests. Shareholder Agreements are considered a relatively modern legal instrument within the global business environment and may, when used between shareholders, address and remedy many gaps that are not regulated by companies laws.

Definition of a Shareholder Agreement

A Shareholder Agreement is defined as a contractual document containing detailed provisions that regulate the relationship between shareholders. It may also regulate the relationship between shareholders and other parties, such as the company itself or any external third party.

Purpose of a Shareholder Agreement

A Shareholder Agreement seeks to address gaps that are not regulated either by law or by the company’s articles of association. Accordingly, it is customary for such agreements to include provisions regulating matters such as voting conditions for the election of board members, conditions for the removal of board members, voting mechanisms and alliances among shareholders at general assemblies, exit mechanisms for minority shareholders, profit distribution arrangements, and other matters agreed upon by the shareholders.

Timing of Entering into a Shareholder Agreement

Shareholder Agreements may be concluded at the time of incorporation of the company, and they may also be entered into at any stage during the company’s existence.

Shareholder Agreements under Companies Law No. 1 of 2016

The Kuwaiti Companies Law regulates Shareholder Agreements under Article 30 of Companies Law No. 1 of 2016, which was amended by Law No. 79 of 2019 to grant such agreements binding force. Prior to the amendment, Article 30 provided as follows:

“The founders, shareholders, or partners may, before or after incorporation, enter into an agreement regulating their relationship with one another, provided that such agreement does not include any clause exempting the founders, or any of them, from liability arising from the incorporation of the company. Nor may it include any other conditions intended to be binding on the company unless such conditions are approved by the competent authority of the company, and provided that the terms of such agreement do not contradict the mandatory provisions of this Law.”

Following the amendment introduced by Law No. 79 of 2019, Article 30 now provides:

“The founders, shareholders, or partners may, before or after incorporation, enter into an agreement regulating their relationship with one another, provided that such agreement does not include any clause exempting the founders, or any of them, from liability arising from the incorporation of the company, nor may it include any other conditions intended to be binding on the company unless such conditions are approved by the competent authority of the company. A Shareholder Agreement shall be binding on its parties, and in the event of a breach, the parties to the agreement may apply to the summary matters judge for an order on petition to suspend the voting rights attached to the shares or interests subject to the agreement for a period determined by the judge, or until the dispute is adjudicated by the competent court or arbitral tribunal, unless otherwise agreed.”

Conditions of a Shareholder Agreement under Companies Law No. 1 of 2016

General Substantive Conditions

Under Kuwaiti law, the general conditions applicable to contracts must be satisfied, namely legal capacity and consent, and that the agreement relates to a lawful subject matter and a lawful cause.

Special Substantive Conditions

• A Shareholder Agreement may not violate the mandatory provisions of the Companies Law or public order, even after the amendment of Article 30.

• The agreement may not include provisions intended to be binding on the company unless such provisions are approved by the competent authority of the company.

• The agreement may not include any clause exempting all or some of the founders from liability arising from the incorporation of the company.

Shareholder Agreements and Capital Markets Authority Law No. 7 of 2010

Although Shareholder Agreements are regulated under the Kuwaiti Companies Law, which governs commercial companies in the State of Kuwait, companies licensed by the Capital Markets Authority pursuant to Law No. 7 of 2010 are subject to both the Companies Law and the Capital Markets Authority Law.

Where a potential overlap exists between a general law (the Companies Law) and a special law (the Capital Markets Authority Law), this does not constitute a contradiction nor does one law invalidate the other. Rather, the special law restricts the application of the general law. Accordingly, the provisions of the Capital Markets Authority Law remain applicable to matters falling within the Authority’s jurisdiction when Shareholder Agreements are concluded by entities licensed by it.

Based on the foregoing, several key points arise:

• If shareholders of a company licensed by the Capital Markets Authority enter into an agreement regulating voting for the election of board members or the mechanism for profit distribution, such an agreement may be interpreted as a form of shareholder alliance. In this case, the Authority may intervene to apply its law and the relevant executive regulations.

• If the parties to a Shareholder Agreement collectively own more than 30% of the company’s traded shares, they shall be deemed controlling parties under the executive regulations of the Capital Markets Authority Law.

• The parties to a Shareholder Agreement may fall within the definition of “beneficial owner.” Pursuant to Article 2-1-1, a beneficial owner is defined as any person who has an interest representing 5% or more of the capital of a listed company, whether directly or indirectly, individually, as part of a group, or in alliance with others.

Dr. Fahad Al-Shammari
Associate Professor of Commercial Law
Kuwait University