A shareholders’ agreement is entered into between each of the shareholders in a company. Its purpose is to protect the shareholders’ investment in the company, establish a fair relationship between the shareholders; as well as provide certainty by governing how the company is run.
What does a shareholders’ agreement do?
The focus of a shareholder agreement is to provide guidance on the procedure to be followed when an issue arises.
A shareholders’ agreement is designed to deal, insofar as is possible, with all matters concerning the running of the company including, but not limited to, for example:
- Shareholders’ rights, powers, and restrictions;
- Sale, transfer, or disposal of shares in the company;
- Dividend payments;
- Drag and/or tag provisions – relevant where a group of shareholders (exceeding a certain percentage) wish to force the remaining shareholders to sell their shares, or the remaining shareholders wish to oblige any buyer to buy their shares, on the same terms and at the same time as the other group shareholders;
- Financing of the company;
- Business of the company;
- Good/bad leaver provisions – such provisions can set out the procedure to be followed in the event of a shareholder wishing to sell his/her holding in the company and cease to be a shareholder depending on the circumstances in which they are exiting the company; and
- Restrictive covenants – i.e. non-compete, non-solicitation of business, and staff.
What are the benefits of a shareholders’ agreement?
A shareholders’ agreement is a time and cost-efficient way of dealing with issues before they even arise and providing a finite procedure and position should issues arise, so that there is no ambiguity over the outcome should any such issues arise.
Some of the other benefits of having a shareholder agreement are that it can…
- protect the position of the minority shareholders by requiring unanimous approval for certain important decisions;
- regulate the appointment and/or removal of directors by allowing a shareholder/group of shareholders each to appoint one or more directors as long as they remain shareholders;
- place restrictions on changes to the nature of the company’s business;
- also provide for the resolution of disputes where a deadlock occurs, through mediation and/or arbitration;
- be an important tool in avoiding disputes and conflict. It provides guidance in terms of the procedures and mechanisms for conflict and perceived-immovable situations, through meetings and voting systems;
- create a better relationship between the shareholders; and
- minimise/resolve disputes before they arise by setting out the procedure to be followed for a successful resolution.