A Shareholders’ Agreement is a legal document which outlines the rights and obligations of a company’s shareholders. When a proprietary company is first registered, the company issues shares to its shareholders (its owners) as well as appointing directors of the company. A shareholder is an owner of shares in the company and is effectively the owner or part owner if there is more than one shareholder.
A company is guided by its constitution, which its shareholders agree to when purchasing shares and its directors agree to when consenting to being appointed to that role. Constitutions are the company’s set of rules and are rarely amended. A constitution touches on a variety of matters relating to the company, particularly how shares are sold and purchased.
How a shareholders’ agreement fits into the picture is plugging the gaps that a constitution doesn’t fill or really shouldn’t fill. Some topics, such as bespoke insurance or a specific way the shareholders of a company wish to deal with disputes amongst themselves, aren’t really clear in a constitution. This is where a shareholders’ agreement comes in.
A shareholders’ agreement is only really applicable to those companies with more than one shareholder. Each shareholders’ agreement will have to consider different interests of the shareholders, particularly where there is significant ownership disparity.
A typical scenario where conflicts between shareholders can come to a head is where a majority shareholder will look to ensure that minority shareholders have a lower level of power. Meanwhile, a minority shareholder will aim to prevent the majority shareholders from obtaining too much power over them. Before discussion around shareholders’ agreements are held, it is productive for all parties to understand each other’s interests in the company and understand how the business would look and operative if someone no longer held an active role in its day-to-day operation.
Generally speaking, a shareholders’ agreement will usually be seen to cover off on most or all of the following topics:
- particular business operational issues
- the sales price of shares
- How much a vote at a meeting is worth
- setting a minimum dividend distribution
- setting additional objectives of the shareholders for the company
- how a transfer of shares will work upon the death or disablement of a shareholder
- how the parties will deal with disputes and tackle deadlock clauses, and
- address confidentiality and any restraint of trade requirements.
The process of the parties preparing a shareholders’ agreement will present opportunities such as:
- determining what should happen when expectations are not met by a shareholder. Most people cannot even consider that there might be a shareholder or an appointed director who goes rogue and a shareholders’ agreement helps navigate what happens when it transpires.
- putting pen to paper and committing to the real intentions and goals of the company rather than relying on the subjective recollections and verbal agreements.
- dealing with the prospect of a shareholder dying or their disablement, and what that means for the business and other shareholders, particularly when a shareholders’ next of kin isn’t suited to take the place of that shareholder, and
- eliminating ambiguity and raising real possibilities which have not otherwise been considered when starting out in business.
There are standard straight forward shareholders’ agreements out there and we are sure there are some freebies online. But given the importance of these documents, it is essential you receive legal advice before signing one, and it’s better to have the agreement tailored to the needs of all shareholders rather than a risky tick and flick document from Google. We can help you consider and prepare a shareholders’ agreement. We appreciate that these documents are not always the easiest of conversations to have in the beginning and our team at Bolter are practical and commercial. If you have any questions regarding the need for such an agreement (or the types of topics included in them), please contact us.