A Shareholders’ Agreement (SHA) is a confidential legal document distinct from all other statutory documents of a corporation, applicable in cases where there are more than two shareholders and it is essentially an agreement between all the Company Shareholders that covers how the business is going to operate.
The Company Shareholders conclude on a set of terms that grants them management and control over their corporation and offers them security in case of a dispute rising between the Shareholders.
Content of such an agreement & why it’s useful
- Provides for the protection of minority shareholders.
- Restricting the transfer of shares.
- Provisions in case of death of one of the Company Shareholders.
- Control over the procedural matters of the company e.g written notice of meetings
- Regulating the ownership, voting powers and providing for pre-emption rights.
- Gives control over who can constitute the Board of Directors and gives the right to Shareholder to nominate a prospective Director as well as a say for the removal of a Director.
- Contains clauses for the protection and promotion of the interests of the company.
- Provisions for the resolution of any disputes between the Company Shareholders that may arise in the future (dispute resolution provision and deadlock provisions).
- Dividends: includes the amount of profits to be allocated to Company Shareholders.
- Providing for loans from the Company Shareholders and there re-payment terms.
Things to consider when drafting/the enforceability of Shareholders agreements
The agreement should be carefully drafted and the provisions must be clearly set out in the context so as to avoid any incorrect interpretation of its clauses. It is imperative that the intentions, rights and obligations are not vaguely set out in the agreement in order for the Shareholder to protect his/her position no matter his/her investment in the company.
Shareholders’ Agreements, as previously mentioned are a confidential, personal document merely between the Company Shareholders of the company thus only creating personal obligations between themselves. They do not become a regulation of the company in the way the Articles of Association do which generally govern the Company’s internal procedures and functions of the Company – Nicole ensure all ‘C’ where company is stated. It is important to distinguish between these two documents and their effect and comprehend that the Articles is the constitution of the company and will prevail to solve the legal aspects of the Company while the SHA is binding between the Company Shareholders and will be used only at a Shareholders’ level to solve issues only amongst themselves.
That being said it is important that the SHA is drafted in accordance with the Articles of Association of the Company so as to avoid contradictory clauses in these two documents and end up with an SHA which completely changes the governance of the company; this will in essence give the SHA a more legal statutory effect. However, if the SHA contains clauses which constitute unlawful and invalid limitation of the statutory powers of the company (e.g to increase its capital share) then these clauses do not have legal ground and will be rejected by court since they are contrary to statute law.
Remedies in case of breach of the terms of the agreement
Lastly if the provisions of Shareholders Agreement are violated on the burden of any of the contracting parties then that party has a right to enforce an action for specific performance and for damages.
This type of agreement is an effective instrument in gaining control of the business and over the purchase and sale of shares as well as how the shares are distributed. The terms and conditions of this agreement are a result of negotiations between the Company Shareholders which is approved by each and every subscriber through their written consent and thus it is not subject to any amendments like the rest of the corporate constitutional documents of a company. It also gives a clear understanding to all parties of the agreement regarding their rights and obligations and sets out clear boundaries ensuring a harmonious business relationship is maintained.
Eltoma can assist you with any Shareholder Agreement requirements. Read more here or contact us for further information.