Shareholders' agreements are essentially a private contract between the shareholders of a Company which sets out their rights and obligations towards each other.
A company’s articles of association are the main rules for governance of the Company and are open to public inspection. Therefore, if shareholders want to bind each other privately on matters such as borrowing; requirements for unanimity on major business decisions; agreements not to compete or poach employees or customers; and agreements on dividend policies; then they would be advised to have a shareholders’ agreement in place in addition to their articles of association.
Many business owners realise the benefits of having a clear constitution – covering issues such as share valuation, transmission of shares on death, dividend policy and scope of authority – only too late. The effects of not having at least considered such issues when starting up a business can be disastrous. It is far better to have agreed how situations will be resolved or managed at the outset so that in the event of dispute the parties will have a clear method of resolution, thereby lessening the detrimental impact on the business.
Whereas most provisions in the articles are amended with the approval of the shareholders holding 75% or more of the voting rights, a shareholders’ agreement can only be amended by unanimous agreement of its parties. Therefore, shareholders’ agreements can be a useful document to entrench minority protection provisions for the benefit of a shareholder holding a minority of the shares in the Company.
A breach of a shareholders’ agreement would normally entitle the aggrieved shareholder/the Company to claim damages for breach of contract, which can be a useful deterrent. Alternatively clients can choose to implement provisions to bring about a mandatory transfer of shares for breaches.
Conflicting provisions between shareholders’ agreements and articles (particularly regarding provisions as to how shares are valued and what rights attach to the shares issued) can lead to messy disputes so it is important that both are reviewed to ensure that they are consistent with each other.
KBL corporate solicitors can advise on the pitfalls and draft articles and shareholders’ agreements that clearly set the boundaries and provide for a solution when you most need the protection.