Legal Case Studies

BENEFITS OF A SHAREHOLDER AGREEMENT



A shareholder agreement is an important legal document that outlines the arrangement between shareholders, and establishes a fair relationship between all parties to facilitate the successful running of a business.

Whilst it is not a specific legal requirement to have one in place, some of the benefits of a shareholder’s agreement are as follows.

Dispute Resolution

In the event that the shareholders of the company find themselves in a dispute which cannot be resolved easily, the shareholders agreement outlines dispute procedures to follow for successful resolution.

The use of a shareholder agreement in this regard outlines the positions of minority and majority shareholders in disputes, and avoids the need for costly legal battles or dispute resolution.

Shareholder Rights, Powers and Restrictions

As aforementioned the shareholder agreement outlines the responsibilities, powers and rights of both the majority and minority shareholders.

As a minority shareholder, an agreement can include provisions to protect you and also allow by special resolution, to have a more prominent factor in important decision making. It also usually includes provisions and pre-emption rights for minority shareholders to be included in the offer of shares being sold, whether they are sold by a minority or majority shareholder.

As a majority shareholder, you will already have more of a prominent say in decisions, but a shareholder agreement offers additional security in that restrictions are placed upon minor shareholders using their position to pass on information or create competition. It also usually includes the provision of ‘drag along rights’ to prevent minority shareholders from holding a transaction. 

As a new shareholder, the agreement will outline how you are to purchase shares, if existing shareholders get first refusal and if there is to be a vote as to allow a new shareholder wanting to buy shares, the permission to purchase those shares.

Deadlock

A shareholder agreement can be an important tool in avoiding disputes and conflict; specifically, in terms of deadlock it provides guidance in terms of the procedures and mechanisms for conflict and immoveable situations, through meetings and voting systems.

Profits and Losses

In terms of profits and loss, a shareholder agreement can be useful working in conjunction with the Articles of Association and outlines when and how the profits are distributed, it can also cover the liability for losses between shareholders and what happens in the event that that further investment is required to avoid the dilution of shareholdings.

Competition Restrictions

The shareholder agreement can also outline protective measure for the majority shareholders and the company itself in terms of non-competition. Often the agreement includes provisions that restrict shareholders, major or minor from setting up a business to compete with the company.

This provision usually includes specific territory which is restricted and time periods, as well as the restriction of specific information from certain members that could lead to the set-up of competition. Shareholders should be aware that provisions of information in terms of addressing issues of completion can easily become contentious and must be fully considered and advised upon before proceeding to include.

Management of The Company

As well as the Articles of Association, the shareholder agreement can outline the management of the company in specific detail. It contains information as to business obligations, how transactions and clients are to be dealt with, and company structure, the nature of the business, its aim and territory.

It can also include specific objectives and essentially regulates internal management, and can even cover a change of business direction in the event that circumstances require the business adapt to new objectives, markets and economic changes.

Issuing and Transferring Shares

There are circumstances under which shares can change hands either unintentionally following a death, accident or bankruptcy of a shareholder or intentionally for various personal or commercial reasons. The shareholder agreement can include provisions that involve the transfer of shares or interest in shares, by outlining the rights and powers as to the transfer, and the procedures involved in the valuation of the worth of the shares.

Provisions as to the transfer of shares can be a useful tool in avoiding conflict later down the line, often circumstances for shareholders change and so it is wise to think ahead and ensure that what happens when it comes to the transfer of shares is covered fully.

Confidentiality and Rights to Information

The agreement can also include provisions covering both the company’s information being publicly available and the rights of various shareholders to company documents such as accounts, meeting minutes etc.

It is important to note that some of these items may be covered under the Articles of Association; however, for comprehensive shareholder protection it is advisable to have an agreement in place.


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