The Advantages of Having a Shareholders’
Agreement
A shareholders’ agreement is
a formal agreement between all or some of the shareholders in a company. A
shareholder agreement is usually considered alongside the company’s articles of
association, which defines the relationship between the shareholder and is in
law considered a contract inter se between the shareholders. Nevertheless, invariably a shareholders’
agreement will have a clause which makes its provisions superior to those in
the articles of association.
A shareholders’ agreement is
intended to protect the shareholders’ investments in the company, define the
government structure, working relationship and power inter play between
shareholder as well as protect the interests of the majority and minority
shareholders in a company.
Salient Features of a
Shareholders’ Agreement
As indicated before, a shareholders’
agreement will encompass the rules that regulates the relationship between the
shareholders and their respective interests. It acts as a record of parties’
agreement regarding the governance and running of their company. It also
regulates the conduct of shareholders in terms of what can and cannot be done
as well as their rights and responsibilities.
Some of the matters that will
be covered in a shareholders’ agreement include:
(a) The agreed business or businesses of the
company
(b) The company governance
structure including the structure of the management team;
(c) Provisions on how or how the
senior management team will be appointed;
(d) How key decisions will be
made in the company; that is, by who or what majority;
(e) The rights, duties and
obligations of shareholders;
(f) Modes of financing of the
company’s business or businesses;
(g) Regulations relating to sale
of shares in the company (e.g. permitted transfers, transmission of shares,
pre-emption rights, as well as drag along and tag along provisions) or major
assets of the company;
(h) Procedure regulating the
number of directors, quorum in meetings and director’s appointment and removal
from office;
(i) Regulate the sale of material
assets of the company;
(j) Outline the appointment and
dismissal procedures in relation to directors;
(k) defines the Dividend policy;
(l) Make provisions for confidentiality
and non-compete provisions
(m) Outline the procedure for addition
of new shareholder’s in a company; and
(n) Make provision for dispute
resolution mechanism.
When is a Shareholders’
Agreement Required?
Though there is no legal
obligation or requirements in the Companies Act, 2015 for there to be a
shareholders’ agreement, it is a good practice and highly recommended for a
shareholders’ agreement to be negotiated and signed off between the
shareholders after formation of their company and before any business has been
started. It is advisable to even negotiate a
shareholders’ agreement before the promoters have registered the company and
signed off after the incorporation. This can give promoters a clearer idea of
what they would be entering into, the purpose of the company, the shareholding
structure as well as funding options for the company.
For existing companies, a
shareholders’ agreement should be negotiated and signed offer at the earliest
opportunity and before any disagreements have arisen in order to record the
parties’ understanding and agreement on the management including on governance
and financing of their company as well as disputes resolution mechanism.
A new shareholders’ agreement
should also be put in place when:
(a) The shareholding structure of
the company changes (e.g. as a result of new entrants (allotment of shares to a
new shareholders or in event of transmission of shares to relatives of a
deceased shareholders or exit of a shareholder through death or sale of
shares);
(b) The company adopts a new
business models or new businesses or subsidiaries;
(c) When a company is borrowing
money from its shareholders;
(d) Where a shareholder’s shares
are transferred to related parties who might not have relationship with
existing shareholders;
(e) When a major
director-shareholder is newly appointed or exits the business.
What are the benefits of having
a shareholders’ agreement for your company?
There are many benefits of
having a shareholder agreement, and below are just a few examples:
(a) Confidentiality- Unlike
memorandum and articles of association and special resolutions, a
shareholders’ agreement does not need to be filed at the Companies Registry.
Therefore, a shareholders’ agreement can provide mechanisms for internal
working of the company and relationship between the shareholders which need not
be disclosed to the general public).
(b) Establishes
shareholders’ rights, powers and restrictions – A
shareholders’ agreement defines and offers clarity on the rights and powers as
well as restrictions of both the majority and minority shareholders. It also defines
the processes to be followed when one is exiting the company or when a new
shareholder is being incorporated into the business..
(c) Assists
in management and governance issues– The shareholders’ agreement
will generally offer clarity on governance and management issues such as the purpose
and nature of the business of the company, the duties and powers of the board
and the interplay between the roles of the board and the shareholders and their
decision making rights;
(d) Define
exit and entry procedure– a shareholders’ agreement
can encompass provisions governing the processes of allotment or issuance as
well as transfer of shares, the roles of the transferee, transferor, the board,
shareholders and the company in such processes including prescribing the
procedure involved in the valuation of the company and its shares in such
transactions. The shareholder’ agreement
can also provide for good and bad leaver clauses which will allow the
shareholders to dictate at what price they purchase the shares from
a departing shareholder, dependent on their reason for departing. This can also include definitions of what constitutes
a good leaver, such as retirement, and what is a bad leaver, such as breach of
duties or misconduct.
(e) Drag along rights: These are provisions that ensure
that if the majority shareholders wish to sell their shares, the minority
shareholders must sell their shares as well.
This is meant to prevent the minority frustrating majority when selling
their shares as a purchaser may wish to obtain 100% of the share capital in a
company.
(f) Tag along rights: As with drag along rights, tag
along rights can be included in a shareholders’ agreement to ensure that when
the majority shareholders are selling their shares, any shares held by a
minority shareholder must be bought also. This is intended to prevents minority
shareholders becoming trapped in a company which is controlled by shareholders
with whom they may not have a relationship or may not what the business with.
(g) Providing
guidance on how
to deal with profits and losses as well as a dividend policy- A
shareholder’s agreement can prescribe what will be considered when computing
profits and losses, when the profits will be distributed and even how to deal
with losses in the business. It is also critical for shareholders’ agreement to
provide how shareholders are to receive the profits of the business, especially
in companies where shareholders have varying shareholdings and this should
include the percentage of net profit that must be distributed annually. This
provides clarity to shareholders besides preventing disagreements.
(h) Can
provide for confidentiality and competition restrictions – A shareholders’ agreement can outline protective
measures for the shareholders and the company including protection of the
company’s confidential information and trade secrets and restrict
directors-shareholders’ from setting up or joining competing business or putting
themselves in conflict of interest situations. Such a non-compete provision
will often continue in force for a certain time after a shareholder ceases to
be a shareholder of the company.
(i) Provides
guidance dealing with deadlock situations- A shareholders’
agreement will generally outline the step that can be taken if a deadlock
situation occurs, e.g., providing for a gunshot clause, or through meetings and
voting systems.
(j) Aids
dispute resolution – The shareholders’
agreement will generally outline the dispute resolution mechanisms.
If your would have help in negotiation,
drafting or review of a shareholders’ agreement or practical legal advice on
shareholders’ agreement or representation in a shareholders dispute, please
feel free to email me via mainacy@gmail.com