Securing Stability: The Critical Role of Shareholders' Agreements in Business

Throughout my career, I have seen firsthand the benefit that well-drafted Shareholders Agreements can provide for shareholders and their companies. In this article, I touch on what these agreements are, why they matter and how they can significantly enhance corporate governance.

What Is a Shareholder Agreement?

A Shareholder Agreement is a legally binding contract that delineates the rights, responsibilities, and relationships among shareholders within a company. Unlike a company's constitution, which governs the overall structure, a Shareholder Agreement specifically addresses matters relevant to shareholders' interactions and how the company will be internally managed.

Why Every Company with Multiple Shareholders Should Have One

Risk Reduction and Clarity

Without a Shareholder Agreement, shareholders may lack clarity on each other shareholder's expectations including what the end game is and how they get there, leading to disagreements. By explicitly outlining expectations, companies can avoid unnecessary conflicts.

If a shareholder acts in breach of their obligations under the Shareholder Agreement, the agreement provides for consequences (including forfeiture of shares, potentially at a discounted price) and a procedure that the parties can follow to resolve the dispute. Without a Shareholder Agreement, if a shareholder does not do what they were supposed to do, there is no process to follow and no clear consequence for failing to do what they were supposed to do.

Customisation and Tailoring

Shareholder Agreements allow for customisation based on the unique needs of shareholders. They cover specific matters that may not be adequately addressed in the company's Constitution (if they have one). By tailoring provisions to the company's specific context, shareholders can better align their interests and expectations.

Key Provisions in Shareholder Agreements

Below is a summary of the critical provisions typically found in Shareholder Agreements:

Purpose and Objective

Company's purpose and long-term objectives.

Funding and Capital Structure

• How the company will be funded.

• Terms of shareholder loans and procedures for issuing new shares.

• How shares can be allotted to existing or new shareholders.

• Dividend policy.

Management and Decision-Making

• Shareholders' rights in appointing and removing directors.

• Board representation rights.

• How many attendees are required for a meeting to be valid and how many votes are required to pass a resolution.

Exit Strategies and Share Transactions

• Procedures for shareholders entering or exiting the company.

• Procedures to follow in the event of death or TPD of a shareholder (do shares go to the estate or are they offered to shareholders?).

• Scenarios such as selling shares, transferring ownership, or buying out other shareholders.

• Valuation methods for shares during transfers or allotments.

Dispute Resolution

• Mechanisms for resolving disputes.

• Consequences of breaching the agreement, including forfeiture or forced sale of shares.

The Risks of Not Having a Shareholder Agreement

In the absence of a Shareholder Agreement:

• Disputes: Disagreements among shareholders can lead to unnecessary and prolonged disputes, affecting company operations.

• Uncertainty: Shareholders may lack clarity on their rights and obligations.

• Stagnation: Decision-making processes may become cumbersome, hindering company progress.

Conclusion

Shareholder Agreements are essential tools for harmonious shareholder relations, efficient company management, and risk mitigation. Every company with multiple shareholders should prioritise creating a robust Shareholders Agreement to safeguard its future success.