The Importance of A Shareholders Agreement

1. Board of Directors

A shareholders’ agreement needs to set out the maximum number of directors and the percentage of shares required to appoint a director. It should also contain provisions on when and how a director can be removed, what their duties are, how meetings are called and how they will vote (i.e. will each director have one vote, or will they have as many votes as the shareholder who appointed them?).

2. Shareholder Economics

The agreement should clearly stipulate the shareholding of the shareholders, the different authorised share classes (if the company has shares other than ordinary shares), the rights attached to each share class, the voting rights of shareholders and any possible rights awarded, or restrictions imposed and tied to specific shareholders (i.e. call options / vesting of shares / restraints of trade etc.)

3. Issue of New Shares

Generally, the agreement will stipulate that any issuance of new shares is first offered to existing shareholders on a pro rata basis. This is the so-called ‘pre-emptive rights’ of shareholders and business owners should be aware of this right.

4. Sale of Shares

The shareholders’ agreement should detail how a shareholder can sell his shares (how they exit). This should be clear in terms of process, notices, time-lines, valuation and method. The valuation of shares is extremely important and should be carefully considered.

5. Deadlocks and Disputes

Disputes happen, and the possibility of opposing views will always be relevant. Where shareholders cannot agree on the running of the company, a deadlock provision resolves this. The agreement should clearly set out how to resolve disputes, and what actions will be taken.

6. Minority Shareholder Protection

A carefully considered shareholders’ agreement will not only protect majority interests but also that of the minority. The goal is to prepare an agreement which promotes trust and creates shared value. Incorporating terms, for example, that unanimous shareholder approval (or the approval of a specific minority shareholder) is required for certain company decisions, is quite common.

7. Anti-dilution Protection

You may also want to consider including provisions regulating the raising of capital to avoid diluting existing shareholders. This is especially relevant when you were a significant capital investor.

It is important to remember that your Memorandum of Incorporation (MOI) is the higher ranking of the two documents. The MOI is however a public document and if there are matters that the shareholders want to govern more privately, same should be included in the shareholders agreement. Note that any matter in the shareholders agreement that conflicts with the MOI will be null and void. It is therefore important that the two documents be prepared simultaneously.

In addition to the terms discussed above, your agreement should reflect the unique culture and purpose of your business. On this basis, if you are getting ready to draft a shareholders agreement for your company or you are reviewing an existing shareholders agreement, we recommend you seek legal advice to ensure that your agreement aligns with your business goals and that you understand the consequences of the provisions contained in the agreement.

Should you wish to know more or have any shareholder agreement related queries, do not hesitate to contact us.

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