The Importance of a Tailored Shareholders' Agreement

 A Shareholders’ Agreement is, simply put, an agreement between the shareholders of a company. This agreement is an invaluable resource for any business as it structures the relationship between the shareholders and provides the foundation for how they will interact with each other.

A Shareholders’ Agreement is drafted in order to protect the interests and investments of all shareholders within the company. It further sets out the duties and rights of the shareholders and regulates the process surrounding the sale of shares by one or more of the company’s shareholders. Furthermore, unlike the Memorandum of Incorporation (“MOI”), it is a confidential agreement not filed in public office.

Without a shareholders’ agreement, possible disputes that may arise in the future between shareholders will not be regulated in a constructive manner. These unregulated disputes will subsequently have a negative impact on the company as well as on the relationship between shareholders and often leads to legal disputes and further litigation costing both the company and shareholders otherwise unnecessary legal expenses.

Many business owners tend to rely solely on a Memorandum of Incorporation. Although the company’s MOI will help to some extent by covering the basics prescribed by law, a fully considered and well-drafted Shareholders’ Agreement will act as a much-needed safeguard where the MOI lacks protection and is thus an important document to consider drafting.

A clear distinction should be made between your MOI and Shareholders’ Agreement, despite them being read together. The MOI should deal with directors’ duties and responsibilities, and the general day to day management of the company, while the Shareholders’ Agreement should set out the rights and obligations of the shareholders; how shares can be bought, sold, and transferred, as well as how disputes are to be handled.

It is important to consider the content of your Shareholders’ Agreement, as it can often cover a vast array of points - such as how the shares are valued and sold, the current shareholders’ rights to first refusal, as well as how shares are purchased.

In a manner similar to marriage, it is commonly found that all of a company’s shareholders are often on the same page when establishing the company, but once a dispute between the shareholders arises any common understanding between those same shareholders quickly dissolves.

Moreover, the shareholders’ agreement should contain specific, important and practical rules relating to the company and the relationship between the shareholders which would be beneficial both to minority and majority shareholders.

These include shareholders’ rights and obligations, regulating the sale of shares in the company, providing protection for minority shareholders and the company, defining how important decisions are to be made, the paying of dividends, and dispute resolution procedures.

It is general knowledge that the one constant in business, is change. Regardless of how well developed your business plan is, changes both externally (including relationships with clients and competitors) and internally (relationships among the shareholders, directors and employees) are inevitable. A Shareholders’ Agreement will enable the company and the owners to adapt to these changes.

More examples of having a properly drafted Shareholders’ Agreement in place include that it can be used to protect the position of minority shareholders by requiring unanimous approval for important company decisions, It regulates what should happen if a shareholder passes away or becomes ill, It avoids issues when creditors wish to attach shares etc., It sets out clear valuation methods It can regulate the raising of capital to avoid the dilution of shareholdings, and It can also provide for the resolution of disputes where a deadlock occurs, through mediation and/or arbitration

Conclusion

In reality, some shareholders of a company in possession of a well drafted Shareholders’ Agreement will never need to rely on its provisions, but more often than not, shareholders, especially when a dispute arises, wish they had taken the time to meet with an attorney to ensure that each of the shareholders’ rights were protected in a regulated manner.

It is of the utmost importance to ensure your Shareholders’ Agreement is tailored to your company’s specific needs while still being in line with the provisions of the Act, and that it aligns with its MOI.