shareholders agreement

A shareholders’ agreement is, as you might expect, an agreement between the shareholders of a company. It can be between all or, in some cases, only some of the shareholders (like, for instance, the holders of a particular class of share). Its purpose is to protect the shareholders’ investment in the company, to establish a fair relationship between the shareholders and govern how the company is run.

The agreement will:

  1. set out the shareholders’ rights and obligations;
  2. regulate the sale of shares in the company;
  3. describe how the company is going to be run;
  4. provide an element of protection for minority shareholders and the company; and
  5. define how important decisions are to be made.

The shareholders’ agreement will contain specific, important and practical rules relating to the company and the relationship between the shareholders.  This can be beneficial both to minority and majority shareholders.

When should we put a share agreement in place?

Usually, it is best to put a shareholders’ agreement in place when you form the company and issue the first shares. In fact, it can be a positive exercise to ensure there is common understanding of shareholders’ expectations of the business. At that point, the shareholders should, as far as is possible, be of a similar mind about what they expect to offer and get from the company. Indeed if the differences of opinion between you at this stage are too strong to form a shareholders’ agreement, it is likely to ring warning bells about the nature of your future working relationship.

You may choose to defer discussing a shareholders’ agreement in order to get on with the important task of establishing the business. While you may have every intention of return to it at a later date when there is more time, the appropriate opportunity may not arise and something else always takes priority. Even if you do pick it up later, by then the shareholders’ expectations and feelings towards the business may have diverged, making it more difficult for them to agree to the terms that should be included in the shareholders’ agreement.

Common Characteristics of a Shareholders Agreement

 Shareholders' agreements vary enormously between different countries and different commercial fields. However, in a characteristic joint venture or business startup, a shareholders' agreement would normally be expected to regulate the following matters:

  1. regulating the ownership and voting rights of the shares in the company, including

           i.            Lock-down provisions

         ii.            restrictions on transferring shares, or granting security interests over shares

        iii.            pre-emption rights and rights of first refusal in relation to any shares issued by the company (often called a buy-sell agreement)

       iv.            "tag-along" and "drag-along" rights

         v.            minority protection provisions

  1. control and management of the company, which may include

           i.            power for certain shareholders to designate individual for election to the board of directors

         ii.            imposing super-majority voting requirements for "reserved matters" which are of key importance to the parties

        iii.            imposing requirements to provide shareholders with accounts or other information that they might not otherwise be entitled to by law

  1. making provision for the resolution of any future disputes between shareholders, including

           i.            deadlock provisions

         ii.            dispute resolution provisions

  1. protecting the competitive interests of the company which may include

           i.            restrictions on a shareholder's ability to be involved in a competing business to the company

         ii.            restrictions on a shareholder's ability to poach key employees of the company

        iii.            key terms with suppliers or customers who are also shareholders

In addition, shareholders agreements will often make provision for the following:

  1. the nature and amount of initial contribution (whether capital contribution or other) to the company
  2. the proposed nature of the business
  3. how any future capital contributions or financing arrangements are to be made
  4. the governing law of the shareholders' agreement
  5. ethical practices or environmental practices
  6. allocation of key roles or responsibilities

 Key things to be added in Shareholders Agreement

  1. Issuing shares and transferring shares – including provisions to prevent unwanted third parties acquiring shares and how a shareholder can sell shares.
  2. Providing some protection to holders of less than 50% of the shares – including requiring certain decisions to be agreed by all shareholders.
  3. Running the company – including appointing, removing and paying directors, deciding on the company’s business, making large capital outlays, providing management information to shareholders, banking arrangements and financing the company.
  4. Paying dividends.
  5. Competition restrictions.
  6. Dispute resolution procedures.

Risks involved in Shareholders Agreement

There are also certain risks which can be associated with putting a shareholders' agreement in place in some countries.

  • In some countries, using a shareholders' agreement can constitute a partnership, which can have unintended tax consequences, or result in liability attaching to shareholders in the event of a bankruptcy.
  • Where the shareholders' agreement is inconsistent with the constitutional documents, the efficacy of the parties' intended arrangement can be undermined.
  • Countries with notarial formalities, where notarial fees are set by the value of the subject matter, parties can find that their agreement is subject to prohibitively high notarial costs, which, if they fail to pay, would result in the agreement being unenforceable.
  • In certain circumstances, a shareholders' agreement can be put forward as evidence of a conspiracy and/or monopolistic practices.

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