Shareholders’ Agreements are contracts between the members of a company which outline the way in which the company will be operated and may determine the rights and obligations of each shareholder. Although there is no legal obligation to conclude such agreements, these are a useful tool to prevent conflicts arising in the management or decision taking of a company or alternatively, be used to reach a solution when a conflict arises.
The Articles of Association, which outline the internal operation regulations of a company, is a public document and can be accessed by the public through the Department of Registrar of Companies and Intellectual Property. Sensitive matters such as shareholder rights and obligations are best to be set out in a Shareholders’ Agreement which, as a private contract, cannot be accessed by the public. It should be noted that the terms included in Shareholders’ Agreements need to be in line with the provisions of the company’s Articles of Association, while any terms agreed which significantly contravene the provisions in the Articles of Association should be reflected in the latter through an amendment.
Shareholders’ Agreements may be employed to set out the terms governing the issue and transfer of shares or the appointment of directors. A Shareholders’ Agreement may provide for restrictions on who can become a Shareholder, which translates to being able to control who becomes your next business partner, a possibility which is crucial in smaller businesses.
In other cases, such agreements may determine matters related to the structure or management of the company, including inter alia, the responsibility of Shareholders for contributing funds to the company in accordance to their respective interest in the company, how the company accesses or utilises these funds and provisions for cases when a Shareholder is not able to produce the proportionate contribution.
As most decisions in a company can be taken with a positive vote of a simple majority, minority Shareholders can often find themselves oppressed by not being able to affect the decision-making process. Shareholders’ Agreements can be used to set in place safeguards to prevent this by deciding on a higher percentage majority requirement for decisions in certain areas.
Shareholders’ Agreements can also provide various exit strategies in the event that Shareholders’ personal circumstances and objectives change and thus can no longer run the company together. Exit strategies may require the departing Shareholder to offer his/her shares to the other members of the company, while the Agreement may even provide for a mechanism or formula to determine a fair price to be paid for such shares.
Although not mandatory, Shareholders’ Agreements are a tool which can be used to determine the rights and obligations of Shareholders, how the shares are sold, how the company will be operated and how decisions will be made. As such, Shareholders’ Agreements can be a cost-effective method to prevent or minimise disputes between Shareholders in the future.
