Shareholders’ Agreement – Importance and Key Areas
15 Nov 2021
The shareholders’ agreement is simply a contract between some or all of the shareholders of a private company limited by shares, and therefore can deal with any aspect of the relationship between the parties, including personal rights and obligations.
On the other hand, the articles of association of a company (“articles”) can only take effect as a contract between the shareholders in their capacity as members of the company and so cannot deal with matters that are personal to the members, such as any employment matters.
The shareholders’ agreement regulates the relationship between the shareholders and their protection, the ownership of shares and the management of the company. The shareholders’ agreement can be viewed as a safeguard to the shareholders’ and their rights and can also provide for contractual remedies, notably damages, whereas the articles of association do not offer that protection. Therefore, the shareholders of a company should consider entering into a shareholders’ agreement in order to secure their rights and know their obligations, along with the provisions of the articles.
There are multiple situations where shareholders could find themselves in a difficult position, or even exposed, when a shareholder’s agreement is not in place.
For instance, in absence of the relevant “drag along” and “tag along” provisions in a shareholders’ agreement, the minority shareholders could block the share sale of a business. Also, in absence of pre-emption provisions, a shareholder could sell its shares to an unknown party to the rest of the shareholders and this could eventually lead to losing control of the business or changing its vision.
In private companies, and especially the small/medium ones, there are usually a few shareholders that are often directors of the company, and this is where a shareholders’ agreement becomes useful as the minority shareholders, the majority shareholders and those holding equal shares want to ensure that their rights are protected in ways that in most cases are not provided for in the articles.
The shareholders should obtain legal advice before entering into a shareholders’ agreement so that they are informed as to what type of agreement is more suitable for them and will give them the protection sought.
Key areas/issues to consider and include in a shareholders’ agreement
- Who are the current shareholders and what are their percentage interests;
- How will they acquire their interest (i.e. by purchasing existing shares, by cash subscription etc.);
- Will individual shareholders’ interests carry different rights, for example regarding dividends or special voting (including veto or consent rights);
- Directors/ appointment and removal of directors/ board meetings and quorum;
- Consent/veto rights: it is common for certain matters that are crucial for the company to require the unanimous consent of all shareholders or the consent of a particular majority;
- Share transfers (pre-emption rights, deadlocks, lock-ins);
- Leaver provisions and tag and drag rights;
- Funding (how will the company be funded, raising of funding by issuing further equity or borrowing);
The points set out above are examples of key issues/areas that the shareholders’ agreement could cover. The list is non-exhaustive as the shareholders’ agreement is ultimately a contract between the shareholders and it is in their best interests to regulate in written the relationship between them and create certainty as to their rights and obligations.