What is a Shareholders Agreement
A Shareholders Agreement is an agreement between shareholders as to how they will operate and control a company together. It is the ‘road map’ which is set to govern the relationship of the parties and how they will behave towards each other before, during and at the end of that relationship.
When Should You Prepare the Shareholders Agreement?
Earlier the better. The earlier the agreement is made the more likely that the shareholders can be clear as to their expectations and character traits (flaws). The process of preparing a Shareholders Agreement typically helps frame the expectation of all shareholders as to how they see the venture progressing. If there is a difference of views/opinion, it is always better to get those out on the open before any real problems with the business arise.
The process of preparing the Shareholders Agreement typically helps shareholders think not only if what may go well but also what to do if things go wrong and how they might need or want to deal with those issues should they arise.
What Are Some Of The Things You Need to Consider?
Whilst not exhaustive, some of the matters that you should be considered n preparing your Shareholder Agreement include:
- At what stage of ownership will a shareholder have a right to appoint a director to the operation of the Company? Typically as the level of commitment grows, most shareholders will want a ‘seat at the table’ when it comes to ongoing decision making.
- What controls or limitation do you want or should be imposed upon the directors of the business. Minority shareholders (especially if they are not directors) may wish to exert control or oversight on broader range of issues so as to protect their interests from being overrun by the other majority shareholders. On the flip side, directors (and majority shareholders) may prefer less oversight.
- What happens in the event that a shareholder wishes to sell their shares? Is there a right of the other shareholders to acquire those shares (a ‘pre-emptive’ right). Are there any circumstances where a shareholder can be compelled to sell their shares (or example upon the bankruptcy of a shareholder, a breach of obligations by a shareholder? If so, how are the shares to be valued?
- Whether the shareholders will be subject to any restraints of trade after they sell shares. Shareholders’ agreements will often have restraints on the shareholders participating in competing businesses. This may be problematic in circumstances where shareholders have other interests. Some of the matters that need to be considered include:
- Whether the shareholders have interest or involvement in any existing businesses which may overlap with the new business; and
- What participation and commitment will the shareholder have in the business. Is this business going to be the primary focus of the shareholder? Do they have other interests for which they don’t wish to be restrained from participating in?
- How will shareholders deal with disputes that may arise? Will there be a mandatory dispute resolution provisions? Will there be a focus on deadlock mechanism to break any intractable dispute? What will be the triggers for either?
- What will be the financial commitment of the shareholders and how will that commitment be made? As equity or loan capital? Will there be ongoing expectation in terms of raising capital and funding the business?
As part of prudent business planning, it is important for the shareholders to consider how they will seek to manage both their ownership and management of the Company. A well-crafted Shareholders Agreement will provide a road map for all shareholders to deal with the issues that are likely to arise in the normal course of owning shares in a Company. In essence a Shareholders Agreement may help you navigate a problem before the problem becomes intractable or incapable of resolution. With that a Shareholders Agreement will not only save you time but it will also save you costs and will limit uncertainty.
If you would like to discuss a Company Power of Attorney or require more information please contact: Heath Adams Director-Lawyer.
Written by Heath Adams.