Summary note

• Overview
• The importance of having a shareholder’s agreement

Overview

A shareholders’ agreement is a document which outlines the relationship between shareholders, their rights and obligations and ensures smooth governance of a company.

The importance of having a shareholder’s agreement is:

1. Clarity of Rights and Responsibilities

The shareholders’ agreement defines the roles of shareholders, including their rights to dividends, voting powers, and decision-making processes. This ensures that all shareholders understand their positions, minimizing the potential for misunderstandings or conflicts.

2. Dispute Resolution

In the event of disagreements, the shareholders’ agreement includes provisions for dispute resolution mechanisms, such as mediation or arbitration. This can help to avoid unnecessary litigations which are costly and time consuming.

3. Protects Minority Shareholders

The shareholders’ agreement ensures protection of minority shareholders, protecting their interests from being overrun by majority shareholders.

4. Prevents Unwanted Transfers of Shares

The shareholders’ agreement can restrict the sale or transfer of shares to outsiders, ensuring that control of the company remains with the existing shareholders. It may include pre-emption rights, giving existing shareholders the first right of refusal if another shareholder wishes to sell.

5. Exit Strategies

The shareholders’ agreement outlines clear procedures for shareholders who want to leave the company, such as valuation methods for shares and buy-out terms. This can avoid disputes over the value of shares and exit conditions.

6. Decision-Making Framework

The shareholders’ agreement lays out the processes for important company decisions, such as issuing new shares, mergers, or borrowing funds. This ensures that critical decisions have a clear approval process, this may require a supermajority or unanimous consent.

7. Future Financing and Dilution

The shareholders’ agreement provides how the company may raise new capital and how new shares are issued, it can protect existing shareholders from unintended dilution of their ownership stake.

8. Confidentiality and Non-Compete Clauses

The shareholders’ agreement may include clauses that ensure shareholders keep company information confidential or prevent them from engaging in businesses that compete with the company.

9. Flexibility Compared to Articles of Association

The shareholders’ agreement is private and can be tailored to the specific needs of the shareholders, providing more flexibility in governance, unlike the articles of association, which is a public document and governed by company law.

Conclusion:

The shareholders’ agreement helps to protect the interests of shareholders, by  providing stability, clarity and protection in the day-to-day operations and long-term strategy of the company.

Disclaimer: This article is authored by Jill Kato, an Associate from Rive & Co, a new and innovating law firm as a result of the partnership between ABC Attorneys, Stallion Attorneys and Sepia Attorneys, built on the foundation of trust, credibility, and novelty, offering expert legal solutions.  This Article is for informational purposes only and should not be construed as legal advice. It is recommended to consult with a qualified legal professional for advice specific to your situation.