(Newswire.net — June 6, 2020) — A shareholders’ agreement is a consensus among a company’s shareholders. The purpose of the document is to control their affairs among other related issues. A shareholders’ agreement is usually drafted together with the company’s articles of association but it has several benefits over the articles of association. Some of them are as follows:
– A shareholders’ agreement is more flexible.
– They are a private contract and are allowed to be strictly confidential.
– They can impose restrictions on shareholders beyond those allowed by the articles of association.
We would always suggest that in situations where there are multiple company shareholders, they should seriously consider entering into a shareholders’ agreement to guide their interactions.
You’ll find that agreeing to adhere to a shareholders’ agreement is more than worth the time and money of creating one as it will more often than not the solution to disagreements in the later life of the company.
There are so many provisions of a shareholders’ agreement that it was impossible to list all of them here according to Net Lawman. However, we have included some features you would expect from a shareholders’ agreement so you can make a highly informed decision.
A shareholders’ agreement is usually bonded with an investment by the shareholders. The shareholders’ agreement, therefore, serves as a sort of agreement outlining the terms, conditions, and form of investment.
The agreement will also indicate the source of financing of the company including any initial equity investment of the shareholders. It will also indicate whether the source of the capital is from loans or further equity from the existing shareholders.
Private companies are allowed to take up any commercially viable business that the directors feel is in the company’s best interests. The directors will then refer to the shareholders’ agreement which will outline the extent and nature of the company’s business proposition so that it is restricted to the departments the shareholders originally felt was right.
Company law states that daily business decisions are often made by the directors without the involvement of the shareholders. The shareholders’ agreement can be used to outline certain key areas that the shareholders would like to own control over and potentially veto rights and/or weighted voting provisions.
The shareholders’ agreement can also be used to dictate the terms under which company directors are appointed; if the shareholders would like to be represented when making board decisions.
It is not a rare occurrence for a shareholder or a party associated with a shareholder to double as a company director. This puts them in a potentially strong stance to decide how much money they make.
The shareholders’ agreement can also dictate the director’s initial salary as well as the criteria to justify the amount of money paid to the director. This might be detrimental to the aspirations of other shareholders as the salary will deduct the money available for dividends.
As per the Companies Act of 2006, shareholders are allowed limited access to information about the daily operations of the company. For instance, they are allowed rights to view the company’s annual accounts, but they are not permitted to view management accounts on a monthly basis.
The shareholders’ agreement can allocate certain rights and powers to the shareholders especially when it comes to information access because the shareholders can monitor their investment in a more detailed approach.
Shareholders in private companies have a higher likelihood of being more familiar with the operations of the business and its clients in a more intimate fashion. The shareholders’ agreement can possibly add restrictions that would keep the shareholders from competing with the company during their time as shareholders and for a reasonable time after they have sold their shares.
For most businesses, their working staff is considered their most valuable asset. The shareholders’ agreement can, therefore, outline restrictions that would prevent a shareholder from poaching important staff of the company. However, this can only apply during their time as a shareholder and for a considerable amount of time after.
It is not uncommon for shareholders to fall out or challenge each other in dispute regarding the management of the business. Not arriving at a solution might prove detrimental to business operations and might put the future of the company in jeopardy. Having an effective dispute resolution procedure outlined by the shareholder’s agreement is important in protecting the company from stagnation.
The shareholders’ agreement can provide for a variety of different solutions depending on the nature and context of the deadlock. It could be professional mediation through or allowing for put and call options so that one group of shareholders can be allowed to buy the other out at a fair price.
Shareholders usually come up to create a joint venture if they are familiar with and trust other shareholders. Having the shares owned by just about anybody or having to engage with a party they may not be familiar with is something shareholders do not like. However, this limitation needs to be balanced with a shareholder’s desire to transfer their shares to earn back their investment should also be considered in such an arrangement.
The shareholders’ agreement will, therefore, dictate the manner in which a shareholder can sell their shares should they want to.
A lot of shareholders would like to sell the company to a third party and for this to be possible, a shareholders’ agreement should include ‘drag’ and ‘tag’ provisions.
Drag provisions permit a group of shareholders to compel the rest of the shareholders to sell their shares on the same terms and at the same time as the main group but only if the group desiring to sell holds a certain percentage of the entire group of shareholders.
Tag provisions, on the other hand, permit shareholders to force a buyer to buy their shares on the same terms as they are buying other shares. These terms usually benefit the minority shareholders as it allows them to avoid missing out when other shareholders are selling their shares.