Shareholders’ Agreements

A Shareholders’ Agreement is an important document to confirm the rights of the shareholders apropos each other and other stakeholders in the business, as well as to specify how the shareholders intend for the company to operate. A shareholders agreement fills in the gaps on issues where the law remains silent. The agreement is a blend of company law and contract law, with the understanding that statutory requirements must be observed at all times.

The primary reasons for having a Shareholders’ Agreement are:

• to protect minority shareholders’ rights and their investments. If a shareholders agreement is not in place, there is a risk that majority shareholders may be able to force through decisions that are not necessarily in the minority shareholders’ interests. Decisions that may even reduce the value of the minority shareholders’ interests in the company;
• to clarity the decision making processes. In situations where some or all of the shareholders are also directors, they could make operational decisions that serve only one or two of the shareholders, as opposed to all of them – without the other shareholders even becoming aware of it! A shareholder’s agreement can be used to set out the decisions that directors may and may not make, and the decisions that shareholders may and may not make; and
• to enhance the provisions of the memorandum of incorporation, and to fill in any gaps by addressing issues that are not otherwise covered in the MOI.

There is an additional advantage of having a shareholders agreement in place: the likelihood of disputes is substantially reduced when there’s a clear, written agreement. And where disputes do arise, a written agreement between the shareholders will go a long way to resolving conflict more quickly, easily and cost-efficiently. A shareholder’s agreement also includes provision for valuation of the shares should a shareholder wish to sell some or all of their shares. The valuation method used can be specified, depending on the shareholders’ requirements, and negotiated between the shareholders before the agreement is signed. A further protective measure built into a shareholders’ agreement is the provision of strict controls surrounding the sale of shares to third parties.

A template Shareholders Agreement can be used by most private companies. Our sample shareholder’s agreement revolves mainly around the shareholders’ rights and powers, with the provision of controls and safeguards, as opposed to specifics about the business itself. Once signed, there is no reason why the shareholders cannot amend it or replace it at a later date, if their circumstances and requirements change.

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.