Should my shareholder agreement be witnessed? Or signed as a contract without a witness? Does it matter?
For a shareholder contract to be legally binding there needs to be some “consideration” given be each party. This is a fancy was of saying that each party needs to give something to the other. There will always be, in a shareholder agreement, some consideration between the parties as they will inevitably be agreeing to do or not to do something (for example, not competing with other businesses, or to operate in a certain way).
So shareholder agreements can be signed as a normal agreement and not as a deed and still be legally binding. However some companies choose to sign their shareholder agreement as a deed for a number of reasons. For example if the contract gives a person more authority or makes them a power of attorney it has to be executed as a deed.
Another effect of signing a shareholder agreement as a deed is that it is legally binding for longer. A person can sue on a deed for up to 12 years from the date that the contract is breached, whereas if the shareholder agreement is signed as a simple contract it is legally binding for up to 6 years after the breach date.
In addition to this, the terms of a typical shareholder agreement specify that each new shareholder is generally required to execute a ‘deed of adherence’ in which they will agree that the shareholder agreement is binding upon them when they become a new shareholder of the company. A deed of adherence is best executed as a deed because there is likely to be no consideration given to the new shareholder from the existing shareholders.
So, should a shareholders agreement be executed as a deed or signed as a simple contract? Both methods are legally binding but have slightly different effects.