What is a Shareholder Agreement?
A Shareholder Agreement is a contract that governs that relationship between the shareholders and stipulates the rights and obligations of the shareholders. It can also act as a supplement to the company’s constitution by adding on an extra layer of protection in terms of regulations.
How does a Shareholder Agreement come in useful?
A Shareholder Agreement would be useful to
1. Record the agreement among the shareholders as to how the company is to be managed and run.
With multiple shareholders, it would be hard to align precisely what each shareholder wants in the company. With a shareholder agreement, it allows the shareholders to have a clear understanding of the company’s policy before buying into the company.
2. Define the rules and regulations that the shareholders have to follow when making important decisions for the company.
In a company with several shareholders, there might be instances when the shareholders are not on the same page in making important decisions for the company. When the rules and regulations that the shareholders have to follow when making important decisions for the company are well defined, it makes the entire decision-making process a smoother one, with clear decision-making procedures such as by voting or by a percentage that is stated in the shareholder agreement.
3. Protect the interest and rights of all the shareholders, including the protection of minority shareholders.
A shareholder agreement would stipulate certain rights of the existing shareholders. For instance, shareholders should be made aware of specific rights such as voting rights for the addition of new shareholders or as a part of the decision-making process. Shareholder agreements would add an extra layer of protection, especially for minority shareholders.
4. Preserve the confidentiality of corporate arrangements.
A shareholder agreement can be used to keep certain company arrangements confidential as it is not required to be submitted as part of a company’s incorporation process. Whereas, company constitution documents are readily available in publicly searchable databases.
In short, a Shareholder Agreement allows for the establishment of good governance within a company, demonstrating a maturity which would make the company more attractive to potential investors.
When should Shareholder Agreement be drafted?
All companies are required to have a company constitution that should be submitted as part of the company’s administrative process. A shareholder agreement is not compulsory. However, it is still highly recommended for corporations with more than one shareholder.
The best time to draft a shareholder agreement would be before the company incorporates, instead of after. The reason why it should be drafted as a part of your set-up process is because it allows the shareholders to make an informed decision to buy into the company, minimizing disputes and facilitating dispute resolution.
What should a Shareholder Agreement entail?
A well-drafted shareholders agreement should entail the following:
1. The number of shareholders and total share capital of the company.
2. How the company is to be managed and by whom.
3. The responsibilities, rights and duties of the respective shareholders.
4. Minority shareholders protection rights
5. When and how the shares can be transferred.
6. Rules for dividing dividends and contributions of the shareholders.
7. Termination rights.
8. Dispute resolution procedure.
Please note that this article does not constitute express or implied legal advice, whether in whole or in part. If you require legal advice, please contact me at firstname.lastname@example.org.