Shareholders disputes can be a serious disruption to any business operation and costly for all involved. This is why it is important to put in place appropriate governance documents from the start of any business arrangement.
What are shareholders agreements?
Shareholders agreements set out the basis of the relationship between shareholders and deal with the practicalities involved in running a business. A company’s constitution alone will generally not be sufficient to deal with these issues.
Why have a shareholders agreement?
The aim of a shareholders agreement is to minimise the possibility of misunderstandings or disputes between shareholders in a range of situations, including exit strategies.
It is also important to note that having an appropriate exit strategy in place may increase the marketability of the company in the event you wish to sell the business. A purchaser will likely not want to acquire 85% of a company or deal with problematic minority shareholders!
A shareholders agreement will also assist to clarify any grey areas or ambiguities in the parties’ intentions regarding the business from the start, leaving the shareholders to the job of running their business and making it a success.
What issues should they cover?
A shareholders agreement will generally cover the following:
(a) Commitment to the group and the business
A shareholders agreement should contain a provision requiring all shareholders to cooperate with each other to ensure that the business remains successful.
The agreement can also set out the minimum involvement that each shareholder is to have in the business and how any remuneration is to be calculated.
(b) Confidentiality and restraint of trade
The agreement can also contain a confidentiality clause preventing shareholders from disclosing ‘trade secrets’ to outsiders.
Depending on the circumstances, a restraint of trade clause which prevents a shareholder from competing with the business while still a shareholder or after leaving the business should be included.
(c) Composition of the board
The issues relating to board composition and meeting procedure include:
- the rights shareholders will have to nominate a representative director to the board;
- situations in which a director can be removed;
- how often board meetings and shareholders’ meetings must be held and the required quorum;
- voting rights of the directors;
- who is to be chairman and does the chairman have a casting vote; and
- how many signatures will be required for the signing of cheques.
(d) Terms of agreement
Under what circumstances will the agreement come to an end? This can be after a certain agreed time frame, or it can be in the event the shareholders cease to hold any shares in the company. It can be helpful for shareholders to consider their eventual exit strategy – i.e. a sale to a third party or one shareholder taking over the business.
(e) Meetings and resolutions
The shareholders agreement should set out:
- which decisions require the majority consent and those that require special majority or unanimous consent of the board; and
- which decisions should be referred to a shareholders’ meeting for approval.
Examples of decisions which may require special majority or unanimous consent may relate to:
- the allotment of further shares to shareholder;
- a proposed change in the direction of the business;
- the winding up of any group company; and
- purchases by the company over a set dollar value.
(f) Transfer of shares and pre-emption rights
The agreement should cover the process to be followed if one of the shareholders intends to sell their shares or receives an offer from a third party to buy their shares.
A pre-emption clause usually provides that a shareholder cannot sell their shares to an outside party without first offering them for sale to the remaining shareholders. A pre-emption clause would generally be included in a shareholders agreement to ensure that the remaining shareholders retain control of the business.
(g) Absence, retirement and death of a related principal of a shareholder
The pre-emption arrangements will usually also apply in the event of an absence, retirement or death of a person listed in the agreement as a related principal of a shareholder (related principal).
This raises the following issues:
- in what circumstances should a related principal be required to retire from the business;
- how much notice needs to be given of a pending retirement; and
- in what other circumstances is there to be a compulsory transfer of shares (e.g. deliberately devaluing the business, total and permanent disablement, death, divorce)?
(h) Default
Shareholders should give consideration as to what happens if one of the shareholders breaches the agreement. This also gives the parties the opportunity to specify what they consider to be a breach of the agreement – for example poor performance by a shareholder in the business or termination of their employment.
(i) Dispute resolution
Parties should also consider how shareholder disputes are to be resolved – should they be referred to mediation or arbitration or should a deadlock breaker clause be included?
Disclaimer
This information is provided as a guide only and is not intended to constitute advice whether legal or professional. You should obtain appropriate advice concerning your particular circumstances.
** Information current as at publishing date.
