Business readiness

Shareholder Agreements

What is a Shareholder Agreement?

Any agreements between shareholders of the company that includes rights and obligations related to how shares can be transferred or votes can be made at shareholder meetings.

A shareholder agreement is an agreement made between two or more shareholders, independent of the company’s constitution or contracts in which the company is involved.

The agreement may contain clauses on the roles and responsibilities of shareholders, how your company will be managed, how disputes are to be resolved, the rules and requirements around new share issuance, the sale of shares and how to handle a takeover offer.

Why are Shareholder Agreements important for business today?

A standard company constitution or articles of association will not always protect you and your shareholders in the event of a dispute between shareholders and members. Every shareholders’ agreement should be individually tailored because every company is different.

Why are Shareholder Agreements important for an event tomorrow?

Certainty and risk minimization are very important for any investor or lender to consider when they enter into a new transaction. Without a well drafted shareholders agreement, the rights and responsibilities for shareholders remain unclear and therefore open to interpretation and litigation in the future.

A well drafted shareholder’s agreement gives investors confidence as it provides clarity to the rights and responsibilities of equity holders relative to other stakeholders including:

  • What rights will they have in the future if they acquire a minority interest
  • What rights others have that may impact their future position as a minority interest holder
  • What powers shareholders will have as to impact their rights as a lender in the future
  • What powers existing shareholders have to approve, reject, or modify the terms of a proposed transaction

Pros of addressing Shareholder Agreements

  • Helps prevent disputes and associated legal costs
  • Allows for greater flexibility
  • It is a private agreement and not publicly available
  • May result in smoother functioning of the company

Cons of not addressing this topic

  • A small shareholder wants to appoint a director
  • A director has a conflict of interest
  • There is a desire among some shareholders to remove a director
  • Shareholder’s cannot reach an agreement
  • A shareholder decides to sell their holding to another party with unclear motives or interests

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