Why have a Shareholders Agreement?

By Jayne Hart, solicitor, DRN.

Why should you have a Shareholders Agreement? The simple answer to this question is that it makes things easier for shareholders going forward and prevents shareholder disputes happening in the future.

It governs the relationship between shareholders and provides mechanisms for taking away uncertainty. I frequently come across shareholder disputes. In the limited space available, here are some provisions to help avoid them:

Transfers of shares

This is one of the most fundamental clauses within an agreement. Often the overriding requirement of shareholders is that the shares stay with the founding shareholders and cannot be sold outside this group.

This clause assists forward planning for exit and provides answers for the following: “What happens if I want to leave the company and sell my shares and what value will I get for them?”; “What happens to a shareholder’s shares if he dies?”; or “What if the outgoing shareholder is an employee – can he keep his shares?”

Majority/Minority Rights

The agreement can be drafted so that the majority shareholder(s) always have the decision-making powers (including the decision to sell the company). Alternatively, the majority may agree to allow the minority to have rights to protect their interests allowing certain decisions to be made only with unanimous consent.

Deadlock Provisions

In the case of 50-50 ownership the agreement can provide a mechanism to deal with any deadlock situations to make it easier to reach an amicable resolution – bringing in expert advice if necessary. The above is just a taster of how a well-drafted may help.