Shareholders' Agreement (for Three or More Shareholders)

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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 and keeps those rules private between the shareholders, whereas a constitution must be filed with the Companies Office and is therefore publicly available. However, establishing a constitution may also be required if shareholders wish to depart from certain default rules in the Companies Act 1993.

As the business grows and you get new investors or explore other business areas, a Shareholders' Agreement can be 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:

  • Scope of business to be undertaken by the company;
  • How the company will be managed and governed;
  • Actions of the directors that require shareholder approval;
  • Majority 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 (for Three or More Shareholders) Document

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