What is a Shareholders Agreement?
Companies are owned by shareholders. Shareholders have a percentage of the issued shares. The shareholders vote in proportion to their shareholding. In business it is common to have more than one shareholder. However, if the shareholders disagree it is very important to have a shareholders agreement to reduce any disputes. It is advisable to set this up early (in or around the incorporation of the company) when the parties are optimistic and will be in a relaxed position to agree the terms of business between them.
A Shareholders’ agreement is a contract which creates rights and obligations for shareholders beyond the basic rights in company law or in a company’s constitution and it is designed to safeguard the rights and interests of the shareholders within a company.
This agreement is legally binding and applies only to the parties involved, creating a formal contractual relationship between them. The parties to a shareholders’ agreement may be all a company’s shareholders. The company itself is often joined as a party to the agreement.
Multiple Shareholders Agreements
A company can have more than one Shareholders’ agreement in place at the same time. In such circumstances, the agreements should not conflict with each other.
The content of a shareholders’ agreement changes considerably depending on the nature of the company. A shareholders’ agreement for a venture capital backed start-up company is very different to a shareholders’ agreement for a joint venture company.
What is the difference between a Shareholders’ Agreement and company by-laws?
A Shareholder Agreement is a private contract among the shareholders of a company and its content can be kept confidential. On the other hand, the Company Constitution is a public document that outlines the broader internal rules and regulations of a company and applies to everyone associated with the company. Unlike company by-laws, which are mandatory under the law, the Shareholders’ Agreement is an optional agreement entered into between some or all of the shareholders in a company.
Aim of a Shareholders’ Agreement?
The goal of a Shareholders’ Agreement is to provide a framework for decision-making, protect minority shareholders, regulate the transfer of shares, and ensure the smooth operation of the company.When to create a Shareholders’ Agreement?
The Shareholders can enter into this Agreement at any time before or after the commencement of the Company.What can be the duration of a Shareholders’ Agreement?
There is no fixed duration for the Shareholder Agreement. The duration can be fixed under the Shareholder Agreement such as for a fixed period, conditional termination, or upon closure of the company.Who can enter into a Shareholder Agreement?
Any individual above the age of 18 years or legal entity who is also a shareholder in the company the Shareholder Agreement is related to.Is it mandatory to have a Shareholder Agreement?
No, it is not mandatory. However, it provides clarity on the roles, responsibilities, and expectations of shareholders and helps prevent disputes in future.What to include in a Shareholders’ Agreement?
Common rights and obligations in shareholders’ agreements include:
- Shareholder investment and Director Loans
- Salaries for the Shareholders if any
- Provision for Dividends
- Incapacity/ Probate / Legacy Clauses
- the issue and transfer of shares,
- the composition of the board of directors,
- minority investor blocking rights,
- restrictive covenants and
- dispute resolution mechanisms.
A number of other clauses can also be entered into the Shareholders’ Agreement, such as:
A “First Refusal” clause:
This means that Shareholders are not allowed to sell their shares to an outsider without first offering them to the other parties involved in this Agreement.A Drag-Along clause:
This gives majority Shareholders (a pre-determined percentage of Shareholders) who wish to sell their shares to an unrelated third-party, the right to force the remaining shareholders to sell their shares on the same terms.A Tag-Along Rights clause:
This provides “co-sale rights” to the Shareholders. Generally, this clause is used to protect the minority shareholders of the Company. Thus, if majority shareholders sell their stake, it gives the minority shareholder the right to join the transaction and sell their minority stake in the Company.An anti-dilution provision:
This helps protect the shareholders of a company by maintaining the size of their ownership stake in the company when new shares are issued. Without an anti-dilution clause, existing shareholders may experience a decrease in their ownership percentage and a decrease in the value of their shares.Is it necessary to have witnesses for a Shareholders’ Agreement?
No, it is not mandatory under the law. However, having two witnesses above the age of 18 years will add to the credibility of the Shareholders’ Agreement and help in resolving the disputes in future.Can a Shareholders’ Agreement be terminated?
Yes, a Shareholder Agreement can be terminated. The Shareholder Agreement is mainly terminated on the following grounds:- Mutual agreement between parties.
- A material breach of the agreement by one or more shareholders
- Dissolution of the company
- Unforeseen circumstances where the agreement cannot be continued (force majeure event).
If you have any issue as to how current Media law affects you or your company, or how future changes will, please do not hesitate to contact Setanta Solicitors (info@setantasolicitors.ie).
Note: This blog post is for information purposes only and does not constitute legal advice.
