Why your business may need a shareholders’ agreement?

Why your business may need a shareholders’ agreement?

If you are going into business with other individuals and look to manage all aspects of your business relationship, you have to consider putting a shareholders’ agreement in place. It is the most effective means to protect the whole enterprise, your investment and shareholder interests.

When setting up a new enterprise it is hard to imagine that something can (and usually will) go wrong. Even family members and good partners have falling out and any such arguments can significantly affect the running of the business and, in the worst-case scenario, can destroy the business altogether. Having a shareholders’ agreement in place can prevent a costly legal dispute between partners and manage your business relationships smoothly.

What is a shareholders’ agreement?

A shareholders’ agreement is a formal agreement between the shareholders of a company. It protects the shareholders’ investment in the company by establishing a fair and manageable relationship between the shareholders and formal corporate governance procedures.

The agreement will:

  • set out the shareholders’ rights and obligations;
  • describe how to govern the company;
  • regulate the sale of shares within the company;
  • provide an additional layer of protection for minority shareholders and the company;
  • define the flow of decision making in your business.

The agreement will contain specific practical rules relating to the company and governing the relationship between the shareholders. As you can see, this is beneficial for both majority and minority shareholders.

It is vital to have a dispute resolution procedure included. Without an agreed method to resolve disputes, no decisions can be made. It may render the company as unable to operate.

How will a shareholders’ agreement help a minority shareholder?

Without a shareholders’ agreement, a minority shareholder (one owning less than 50% of the shares) can exercise very little control or have his say in the company’s running. The authority will usually rest in the hands of the few principal shareholders. Even if the articles of association include provisions that protect the minority shareholders the holders of 75% of voting shares can usually pass a special resolution giving them voting priority.

A shareholders’ agreement can include the requirement for all shareholders to approve certain decisions. It ensures that you have a say in the critical decisions that impact the business. Such as decisions on:

  • the appointment or removal of directors;
  • the issue and distribution of new shares;
  • taking on large borrowings;
  • changing the course of main trade.

How can a shareholders’ agreement help a majority shareholder?

Suppose a majority shareholder wants to sell their shares but the buyer is only willing to proceed with the sale if he is able to purchase all shares in the company. This is where a minority shareholder can prevent such sale from going ahead by refusing to sell his shares. In that case, the provision forcing the minority shareholder to sell, which may be included in the shareholders’ agreement, would take care of this problem. This is known as a “drag along” provision.

A majority shareholder would want to prevent minority shareholders from passing on trade secrets or other confidential company information to competitors. In addition, a provisional agreement can prevent a partner from setting up rival businesses or from helping the competitor.

Minority shareholders could transfer their shares to anyone. Such transfers could cause problems for other shareholders. Special provisions can prevent the sale of company shares to a competitor or someone else the other shareholders do not want to see involved with the business.

What should a shareholders’ agreement include?

Particulars will depend on the number of shareholders, their respective shareholdings and your goodwill. However, the key provisions are those relating to:

  • Paying dividends;
  • Issue shares and transfer shares (including provisions to prevent unwanted third parties acquiring shares), regulate what happens to shares upon the death of a shareholder and how a shareholder can sell shares;
  • Including “drag along” provisions;
  • Protecting holders of less than 50% of the shares (including requiring certain decisions to be agreed by all shareholders);
  • Competition restrictions;
  • Company governance – including deciding on the company’s business, appointing, removing and paying directors, frequency of board meetings, making large borrowings, providing management information to shareholders, banking arrangements and financing the company;
  • Dispute resolution provisions.

The lawyers in the ORACLE CAPITAL GROUP are the experts in the field of corporate law. They are ready to provide share and asset purchase transactions support, improve shareholder participation, and provide general support to enhance the governance of your business.

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