A Shareholder Agreement may not be legally required, but its value to a company should never be underestimated. Although it may be overlooked in an effort to save money and time, failing to have one in place can sometimes lead to disagreements among shareholders that end up being expensive to handle. Having a Shareholder Agreement is important for several reasons, which we will outline here.
Preventing Disputes
Sometimes, business disputes can arise between directors and shareholders. These can be expensive and time-consuming to manage. A Shareholder Agreement is a cost-effective way of minimising the potential for a dispute to arise since it supplies a procedure and framework to resolve disagreements by outlining the way in which key decisions must be made. It also focuses the minds of the shareholders, and helps to tease out any lack of agreement amongst the prospective shareholders before anything is signed.
Governing The Company’s Management
Usually, the directors will govern the company’s daily operations which means shareholders rights are quite limited when it comes to decision making. When drafted correctly, Shareholder Agreements can ensure the directors are held accountable for their actions and even compel them to obtain consent from the shareholders when making crucial decisions.
Protecting Majority and Minority Shareholders
Shareholder Agreements give minority shareholders protection by ensuring specific decisions require all shareholders to give their unanimous consent. As a result, minority shareholders will be given a right of veto, preventing issues not in their best interests from being forced by the majority shareholders.
Majority shareholders also obtain protection in the form of the “drag along” provision which allows them to force the minority shareholders to participate in the company’s sale on equal terms and thus eliminate the possibility of them preventing the deal from going through. These sorts of provisions can also be seen in a company’s Articles of Association.
Handling Deadlock Situations
If directors and shareholders are unable to come to an agreement on crucial matters, a deadlock situation can arise that brings the business of the company to a grinding halt. Shareholder Agreements can mitigate the risk through a deadlock provision that facilitates a speedy resolution. It is important to note that any accumulative voting powers of over 50% would break the ‘deadlock’, making it even more important to understand which shareholders have what voting powers and who effectively has control of the company.
Controlling Share Transfers
If there are no pre-emption provisions within a Shareholder Agreement, it is possible that shares can be transferred freely, potentially to unknown individuals or even competitors. Shareholder Agreements can supply a mechanism that provides if a shareholder wants to sell or transfer the shares, all of the other shareholders have a “right of pre-emption” over the shares. Should they fail to take that offer up, a clause would be contained in the Shareholder Agreement that requires the new share recipient to enter a “Deed of Adherence” which binds them to the Shareholder Agreement’s terms.
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Disclaimer: This note comprises the view of the author at the time of writing. This note is not a substitute for legal advice. Information may be incorrect or out of date and may not constitute a definitive or complete statement of the law or the legal market in any area. This note is not intended to constitute advice in any specific situation. You should take legal advice in specific situations. All implied warranties and conditions are excluded, to the maximum extent permitted by law.
