Why You Need a Shareholders’ Agreement

The first thing to understand is what exactly is a Shareholders’ Agreement? A Shareholders’ Agreement is basically a contract between the shareholders of a company. It regulates the relationship between the shareholders and sets out what is going to happen in certain situations. A Shareholders’ Agreement is not compulsory and is a confidential document between the parties to the Agreement.

Usually a Shareholders’ Agreement is signed on or before the incorporation of a company. But this is not always the case. A Shareholders’ Agreement can be entered into at any time – it is never too late.

Why do you need a Shareholders’ Agreement?

Think of your Shareholders’ Agreement like a pre-nup. Like any relationship, the relationship between shareholders goes through its ups and downs. Just like a pre-nup, a well drafted Shareholders’ Agreement can cover what happens, not only when there is a “divorce” between the shareholders, but in relation to any disputes or when one shareholder wants to exit the company. It also provides a level of certainty between the shareholders. The Companies Act 1993 only contains limited provisions which only relate to the relationship between a company and its shareholders. It does not regulate the relationship between the shareholders themselves.

Without a Shareholders’ Agreement, trying to resolve a dispute between shareholders on removing a shareholder could be a very costly and lengthy process. The shareholders may even have to resort to litigation to resolve the matter.

During the process of negotiating a Shareholders’ Agreement the shareholders are forced to discuss and try to resolve what will happen if a certain event arises. During this process the shareholders will get to know each other very well and it can be a very important part of the shareholders establishing that they can actually work with each other.

What is in a Shareholders’ Agreement?

A Shareholders’ Agreement will usually cover the following matters:

• nature of the business and how it will be run;
• how many directors the company will have, and who can appoint and remove them;
• the role, rights and responsibilities of each shareholder;
• how funding will be arranged and secured (including shareholder loans);
• transfer of shares – including pre-emptive rights, drag along and tag along provisions, call and put options;
• value of shares – the agreement can set out the process for valuing shares in the event of any transfer by the shareholders;
• removing a shareholder/director – under what circumstances can a director be removed – eg breach of the shareholders’ agreement or acting dishonestly;
• what insurance must the company take out, for example, to fund life cover over a shareholder to fund the purchase of that shareholder’s shares by other shareholders in the event of a shareholder’s death;
• non-competition provisions which prevent a shareholder from competing with the company;
• how are distributions to be calculated? When are they payable and when are they paid;
• what happens when shareholders cannot agree? How is a dispute to be resolved? What if a dispute cannot be resolved?

If you think you need a Shareholders’ Agreement please contact us on 486 2169.