What is a Shareholders’ Agreement?
A shareholders’ agreement is an arrangement between a company’s shareholders. It includes provisions governing the operation of the firm and the interaction between its shareholders. A shareholders’ agreement is often referred to as a stockholders’ agreement. It protects both the corporate entity and the shareholder’s investment in it.
A shareholders’ agreement is created to safeguard both the firm and its shareholders. It ensures that shareholders are treated fairly. It can also benefit minority shareholders, who typically have little power over how the business operates.
A shareholders’ agreement delineates the rights and responsibilities of shareholders, as well as the protocols for distributing or selling shares. It also outlines the operational framework of the business and the decision-making processes.
It’s advisable to craft a shareholders’ agreement during the initial stages of company formation or when issuing the first shares. This facilitates a shared understanding among entrepreneurs or investors regarding their contributions to and expectations from the business. Difficulties in reaching a consensus during the agreement’s formulation may signal potential challenges in the collaboration and warrant reassessment of the relationship.
How Shareholder Agreements Protect Minority Shareholders?
Minority shareholders lack voting control of the company, and in the absence of a shareholder agreement, these shareholders will exert minimal influence in the running of the company. Without such agreements, majority shareholders could make key decisions without considering the input of minority shareholders, potentially leaving them at a disadvantage. Shareholder agreements ensure that major decisions like issuing new shares or appointing directors cannot be made without taking into account the interests of all shareholders, regardless of their ownership percentage.
How Shareholder Agreements Protect Majority Shareholders?
On the other hand, shareholder agreements also offer protection to majority shareholders in cases where minority shareholders may be uncooperative. For instance, they might include provisions like drag-along clauses, which empower majority shareholders to proceed with a sale of the company’s shares even if some minority shareholders oppose it. Also, the shareholder agreement may include a clause that prevents minority shareholders from transferring their shares to a competitor or other party that majority shareholders do not want to get involved in the company. The agreement should also define rules on the sale and transfer of shares, who can purchase shares, the terms and prices, etc.
What is included in the Shareholders’ Agreements?
A shareholder agreement is optional. The contents and provisions fluctuate between cases. The specifics depend on the type of the organization, the class of shares, and a variety of other criteria.
Shareholders’ Rights and Obligations: This section outlines the rights and responsibilities of each shareholder, including voting rights, dividend entitlements, and obligations to the company.
Management and Decision-Making: It defines how the company will be managed, including the appointment and removal of directors, decision-making processes for major company issues, and procedures for resolving disputes among shareholders.
Transfer of Shares: these can range from absolute restrictions to tie-in provisions for a certain period before which a shareholder can sell. Such transfer restrictions can be supported by pre-emption rights, which aim to give the other shareholders the option of acquiring the departing shareholder’s shares before they can sell them to a third party.
Valuation and Exit Mechanisms: These provisions establish mechanisms for valuing the company and determining the price of shares in the event of a sale, merger, or other exit event. They may also include buy-sell agreements outlining the process for shareholders to sell their shares to other shareholders or the company itself.
Right of First Offer – this ensures that a shareholder who wishes to sell their shares must first offer those shares to existing shareholders at a specified price. The shareholder is only free to sell their shares to anyone if no other existing shareholders decide to purchase the shares; the price of the shares must be equal to or higher than the original offer;
Right of First Refusal – operating slightly differently to the right of first offer, this provision ensures that if one shareholder has received an offer to sell their shares, other existing shareholders must have the first opportunity to match that offer to purchase the shares;
Governance and Control: Shareholders’ agreements may include provisions regarding corporate governance practices, such as the frequency of shareholder meetings, quorum requirements, and procedures for amending the agreement itself.
Corporate Governance: This section might specify certain corporate governance practices, such as the frequency of board meetings, quorum requirements, and voting thresholds for major decisions.
Key advantages of having a shareholders’ agreement:
- Risk Mitigation: Well-drafted shareholder agreements mitigate risks by addressing potential conflicts, establishing clear rules for decision-making and dispute resolution, and protecting the interests of shareholders.
- Investor Confidence: Investors and stakeholders are more likely to invest in a company with robust governance structures and clear shareholder agreements in place, enhancing transparency and trust.
- Long-Term Planning: Shareholder agreements facilitate long-term planning and strategic decision-making by providing a framework for collaboration, investment, and growth.
- Exit Strategies: Clear exit strategies outlined in shareholder agreements enable shareholders to exit the company gracefully and maximize value, reducing uncertainty and friction during transitions.
Our experienced corporate lawyers will provide expert assistance in drafting tailored shareholders’ agreements for your business, ensuring comprehensive legal protection and alignment of interests among shareholders.