Shareholder’s Agreement

A shareholder’s agreement is a document detailing an agreement of terms amongst the shareholders of a company. There are often occasions when the constitutional documents of the company do not lay out in great enough detail the relationship between the shareholders and the company. Therefore it is common practice for a shareholder agreement to go in to greater detail in laying out the relationship between the shareholders, which will then effect their relationship with the company. Hewetts have a great deal of experience creating and drafting Shareholder Agreements for companies of all sizes.

In a limited company, each share carries a prescribed number of votes. In most cases all the shares are of the same class and each carries one vote. That means whoever has the majority controls the company. Therefore if the shareholders are not happy with such an arrangement they can use a shareholders agreement to provide a more equal distribution of power, as well as protecting the minority from exploitation. The most usual situations where these circumstances arise are where:      

1. A small number of people all work together want an arrangement whereby all decisions are to be taken unanimously;
2. One shareholder has lent money to the company, but has no personal involvement in its management;
3. Some shareholders are not directors. Therefore they are not in any position to control the company's affairs outside of a general meeting.
4. Shareholders have formed a company with a specific joint venture in mind and when the venture is completed the company will be wound up;

There are quite a few advantages to supplementing the constitutional documents of the company with a shareholders agreement:

• The shareholders can agree virtually anything they want amongst themselves.
• The company's constitutional documents are normally available for public inspection whereas a shareholders agreement, as a private contract, is normally confidential between the parties involved.
• They allow for greater flexibility. The shareholders may think or anticipate that the company's business requires regular changes to their arrangements, and it will be a lot more efficient to use a shareholder’s agreement instead of repeatedly amending the company’s constitutional documents.
• They might wish to provide further protection for minority shareholders, or to provide a mechanism for the removal of minority shareholders while still preserving the company as a going concern.
• The shareholders might wish to provide for disputes to be resolved by arbitration.

Most shareholder agreements therefore deal with the following general issues:

• the nature and amount of shareholder’s initial contribution to the company
• the proposed nature of the business
• how any future capital contributions will be made
• ethical practices or environmental practices
• allocation of key roles or responsibilities
• the governing law of the agreement

More specific issues may include:

1.  Controlling and regulating the ownership and voting rights of the shares in the company, through:

• lock-down provisions
• restrictions on the transfer of shares, or granting security interests over shares
• pre-emption rights and rights of first refusal in relation to shares issued
• minority shareholder protection provisions

2.   Control and management of the company:

• power for shareholders to designate individuals for election to the board of directors
• imposing requirements to provide shareholders with accounts or other information that they might not otherwise be entitled to.
• making provision for the resolution of any future disputes between shareholders, including
• deadlock provisions
• dispute resolution provisions

At Hewetts we can help draft a Shareholder Agreement that is specific to your needs.