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Putting in place a shareholders' agreement can be one of the most important decisions you make as shareholder of a company. Without a shareholders' agreement in place, you may find out very difficult to resolve disputes arising between shareholders as to the direction and purpose of the company.
What is a Shareholders' Agreement? A shareholders’ agreement is an agreement between the shareholders of a company which deals with issues arising out of ownership and management of the company. The absence of such an agreement can lead to serious problems and may result in the company’s failure. What is the difference between a Shareholders' Agreement and a Constitution? Strictly speaking, a company’s written constitution regulates the relationship between the shareholders and between the shareholders and the company. However, a constitution is a document which is available for public inspection, whereas a shareholders’ agreement is normally confidential. For that reason it is often preferable to have a shareholders' agreement in addition to a constitution. The shareholders' agreement can deal with issues you don't want aired in public. Do I need a Shareholders' Agreement? Consideration should be given to having a shareholders’ agreement in the case of any company where there is more than one shareholder. This is especially so where the shareholders are family members and the potential for disagreement can sometimes be greater. The purpose of the agreement is to ensure that decisions are taken by consensus and discussion. Issues covered in a Shareholders’ Agreement The most important benefit of the agreement is that it provides a mechanism for resolving disputes between shareholders, whether by mediation, arbitration or some other dispute resolution processes. Matters covered in a shareholders’ agreement may also include the following:
Shareholder Deadlocks A shareholders’ agreement is particularly useful when dealing with a deadlock situation with shareholders. Where the shares are owned in equal proportions by the shareholders, a disagreement will create a deadlock which means the company is effectively prevented from making decisions. A shareholders’ agreement can include a mechanism to ensure this situation does not occur. A shareholders’ agreement can also deal with the situation when a shareholder dies or become mentally or physically incapacitated. This may mean the remaining shareholders will have to work with a family member of that shareholder and who may have little or no knowledge of the company and its business. A shareholders’ agreement can deal with this by allowing the shares to be sold at a fair price to the remaining shareholders by the family member so that the company can continue to trade without disruption. Summary If you do not carefully consider and provide for situations which may arise between the shareholders, then you could be risking serious disruption and even the ultimate demise of the company. A shareholders’ agreement can avoid this. Parry Field Lawyers provide legal advice on a range of company matters including drafting an appropriate shareholders' agreement for your company. Should you need any assistance with this, or with any other Commercial matters, please contact Peter van Rij or Grant Adams at Parry Field (379 4383).
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