Ten Reasons Why a Company Should Have a Shareholders Agreement
In a detailed article herein published we gave a detailed exposition on the benefits of having a Shareholders Agreement for a limited liability company.
In this excerpt we reiterate and highlight ten reasons why a company should have a Shareholders Agreement: –
- Confidentiality- Unlike memorandum and articles of association and special resolutions, a shareholders’ agreement does not need to be filed at the Companies Registry. This guarantees confidentiality and privacy of the finer details of the internal working of the company and relationship between the shareholders which need not be disclosed to the general public.
- Establishes shareholders’ rights, powers and restrictions– A shareholders’ agreement defines and offers clarity on the rights and powers as well as restrictions of both the majority and minority shareholders. It also defines the processes to be followed when one is exiting the company or when a new shareholder is being incorporated into the business.
- Assists in management and governance issues- The shareholders’ agreement will generally offer clarity on governance and management issues including on issues like purpose and nature of the business, the duties and powers of the board and interplay between the roles of board and shareholders and decision making rights.
- Define exit and entry procedure- a shareholders’ agreement can encompass provisions governing the processes of allotment or issuance as well as transfer of shares, the roles of the transferee, transferor, the board, shareholders and the company in such processes including prescribing the procedure involved in the valuation of the company and its shares in such transactions. The shareholder’ agreement an also provide for good and bad leaver clauses which will allow the shareholders to dictate at what price they purchase the shares from a departing shareholder, dependent on their reason for departing. This can also include definitions of what constitutes a good leaver, such as retirement, and what is a bad leaver, such as breach of duties or misconduct.
- Drag along rights: These are provisions which ensure that if the majority shareholders wish to sell their shares, the minority shareholders must sell their shares as well. This is meant to prevent the minority from frustrating the majority when selling their shares as a purchaser may wish to obtain 100% of the share capital in a company.
- Tag along rights: As with drag along rights, tag along rights can be included in a shareholders’ agreement to ensure that when the majority shareholders are selling their shares, any shares held by a minority shareholder must be bought also. This is intended to prevents minority shareholders becoming trapped in a company which is controlled by shareholders with whom they may not have a relationship or may not what the business with.
- Providing guidance on how to deal with profits and losses and dividend policy- A shareholder’s agreement can prescribe what will be considered when computing profits and losses, when the profits will be distributed and even how to deal with losses in the business.
- Provide for confidentiality and competition restrictions- A shareholders’ agreement can outline protective measures for the shareholders and the company including protection for the company’s confidential information and trade secrets and restrict directors-shareholders’ from setting up or joining competing business or putting themselves in conflict of interest situations. Such a non-compete provision will often continue in force for a certain time after a shareholder ceases to be a shareholder of the company.
- Provides guidance dealing with deadlock situations- A shareholders’ agreement will generally outline the step that can be taken if a deadlock situation occurs, e.g., providing for a gunshot clause, or through meetings and voting systems.
- Aids dispute resolution – The shareholders’ agreement will generally outline the dispute resolution mechanisms.
If you would like to consult on this article or any other legal issue pertaining to Shareholders Agreements or any other matter, you may book an appointment with a seasoned legal expert from our Firm. You may also purchase one of our very well-drafted and comprehensive templates for a Shareholders Agreement here.
Over and above, our team of legal experts can schedule a preliminary call with yourself to understand the specific circumstances of your business and recommend and or draft for your Company a bespoke Shareholders Agreement at a reasonable fee. Your enquiries may be routed through email to email@example.com.