The purpose of a shareholders agreement is to govern shareholders of a company, their business relationship and arrangements, both during and after the relationship.
Shareholders agreements are not mandatory. However, it’s important to set out the rights and obligations of shareholders in a binding agreement so that disputes amongst shareholders are minimised. As no two businesses are the same, shareholders agreements should be tailored to the company and cover all potential scenarios that a business may encounter such as:
- Share transfer
- Management structure
- Buying and selling shares
- Exit strategies
- Restraint of trade
- Appointing directors
- Reporting requirements
- Dividend distribution
- Rights and obligations
- Policies and procedures
- Dispute resolution
A shareholders agreement should reflect the unique needs of the company. Whether you are forming a new company with shareholders or reviewing an existing shareholders agreement it’s a good idea to seek legal advice to ensure that you understand the consequences of the clauses in the agreement. Here are a few important legal clauses to consider or watch out for in a shareholders agreement:
- Forced sale provisions: This clause requires a shareholder to sell their shares. This is often enacted to allow large shareholder to buy out parties in order to avoid a dispute or a deadlock.
- Tag along / Drag along provisions: a drag along clause allows a majority shareholder to require a minority shareholder to sell their shares to a third-party. Drag along provisions can be used when a third-party purchaser wants to buy the whole business. A tag along clause allows minority shareholders to require a third-party purchaser to purchase the minority shareholders’ shares, together with the majority shareholder. This can be used when the minority shareholders no longer wish to continue holding their shares alongside a new majority shareholder.
- Pre-emptive rights: This clause benefits minority shareholders as it guarantees that the current shareholders be first in line to purchase any new shares that are issued.
- No transfers: This clause prevents the shareholder from transferring or selling the share unless consented by all shareholders. This is a common clause in privately owned companies where the few shareholders have a working relationship with each other.
- Compulsory transfers: This clause provides the circumstances under which the shares must be sold to the company. The circumstances will vary and can include provisions for sale if the party becomes insolvent, breaches anti-competition clauses or engages in misconduct.
- Restraint of trade: This clause restrains the shareholder from competing against the company for a specified duration and sometimes over a geographic area.
Legal disputes between shareholders can be costly and can result in the collapse of the business or a forced sale under the control of a receiver. A well drafted shareholder agreement should be entered into at the outset of the business arrangement to minimise the risk of such scenarios. At Cohen Legal we can advise you on the best course of action to protect your interests as a shareholder, your corporation and the future growth of your business.