Why Do You Need a Shareholders Agreement?
Being prepared for the event of a disagreement with a business co-owner, or for when a co-owner wants to exit the business is essential in minimising nasty Shareholder disputes. A Shareholders Agreement allows Shareholders to pre-determine procedures for Shareholder exit and disputes when everyone has a clear head and there is no animosity and allows for the smooth functioning of companies despite these events occurring. Without a Shareholders Agreement, the company would be controlled by laws which are most likely insufficient to protect the rights and interests of minority Shareholders and avoid disputes.
What is a Shareholders Agreement?
A Shareholders’ Agreement is an Agreement between two (2) or more co-owners of a business setting out their agreements with respect to the management and control of the business and roles and responsibilities of each of the co-owners. Shareholders’ Agreements also dictate the rights and obligations of co-owners in the event of a dispute or proposed sale of their interest in the business.
What are the Benefits of Having a Shareholders Agreement?
A Shareholders Agreement:
- limits disputes and allows for the smooth functioning of companies,
- can pre-determine how Shareholders and the Company deal with certain matters, such as for the sale or exit of a Shareholder, to limit sometimes nasty, costly and stressful disputes,
- provides the Shareholders with the opportunity to tailor a contract to their and their Company’s needs,
- unlike the Constitution of a Company, does not have to be made public, which allows for parties to add in sensitive Company matters,
- allows for greater protection of minority Shareholders, and
- ultimately saves the Shareholders and the Company legal costs, time and stress in circumstances where a dispute arises between the Shareholders.
What Does a Shareholders Agreement Include?
Among other things, Shareholders’ Agreements regulate the following:
- the Purpose of the Company,
- the Roles and Responsibilities of Shareholders,
- the Appointment and Removal of Directors,
- Remuneration and Indemnity of Directors,
- Board Meetings, Voting and Decision Making on behalf of the Company,
- Management of the Company,
- the preparation and review of Budgets, Business Plans and Financial Information,
- Access to Company Information,
- Funding of the Company, Loans and Guarantees,
- the Issue and Disposal of Shares,
- Drag and Tag Along rights of Shareholders,
- Rights to Acquire Shares of retiring or terminated Shareholders and methods for valuing Shares,
- Dispute Resolution procedures,
- Restrictions on Competition by existing and former Shareholders, and
- Confidentiality of Information.