Shareholders' Agreement

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What is it?

A Shareholders' Agreement regulates relations between shareholders of a company and how the business and affairs of a company are run.

A Shareholders' Agreement, as you might expect, is an agreement between the shareholders of a company. A well-drafted agreement will:

  • set out the shareholders' rights and obligations;
  • regulate the sale of shares in the company;
  • describe how the company is going to be run;
  • provide an element of protection for minority shareholders; and
  • define how important decisions are to be made.

Why do you need it?

Going into business with others can be risky, whether they are family, close friends, or a new business partner. A Shareholders' Agreement is intended to combat this risk by making sure that all shareholders are treated fairly and that their rights are protected. It is an important tool to balance the rights of the different shareholders.

Using a Shareholders' Agreement to set out the rules also gives more flexibility than relying solely on the company's Articles of Association. Being too prescriptive in your Articles can limit how your company develops. As the business grows and you get new investors or explore other business areas, a Shareholders' Agreement can be quickly and inexpensively updated.

One of the most useful points of the Shareholders' Agreement is what happens if a shareholder wants to exit the company. This can be a stressful time for a business, so to agree from the start how this is dealt with can relieve pressure at the time.

Key clauses to watch for:

When drafting a Shareholders' Agreement, it is important to focus on a number of key clauses, in particular:

  • Actions of the directors that require shareholder approval;
  • Number of shareholders required to approve certain actions;
  • Issue of new shares;
  • Transfer of existing shares;
  • Agreed process for valuing shares;
  • Rights that different classes of shares can have;
  • "Tag-along" and "drag-along" rights that can affect minority shareholders;
  • Resolution of disputes between shareholders;
  • What happens when a shareholder wants to exit the company;
  • Whether shareholders are restricted from competing with the business of the company after they exit; and
  • Events that may trigger the sale or winding up of the company.

Shareholders' Agreement Document