Shareholder’s agreement
A shareholders’ agreement is, as you might expect, an agreement between the shareholders of a company. It can be between all or, in some cases, only some of the shareholders (like, for instance, the holders of a particular class of share). Its purpose is to protect the shareholders’ investment in the company, to establish a fair relationship between the shareholders and govern how the company is run.
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Result
The agreement will:
- set out the shareholders’ rights and obligations;
- regulate the sale of shares in the company;
- describe how the company is going to be run;
- provide an element of protection for minority shareholders and the company; and
- define how important decisions are to be made.
The agreement will contain specific, important and practical rules relating to the company and the relationship between the shareholders. This can be beneficial both to minority and majority shareholders.
Intro
Why having a shareholders’ agreement is important:
1) The agreement works in conjunction with a company’s articles of association, but will give shareholders greater protection than can be provided by the articles alone, not least because companies are often set up quickly and cheaply just with standard articles that will not include much detail regarding protective provisions for shareholders or define the limits of their responsibilities.
2) Ordinarily a company is subject to control in accordance with the comprehensive body of company law (contained in both statute and case law) that governs how a company should be run. However, a shareholders’ agreement can contain any arrangement agreed between the shareholders and can vary what would otherwise be the legal position without it.
3) Unless agreed to the contrary in a shareholders agreement, the management of the company is determined mostly by the board of directors, while certain key decisions (particularly anything relating to ownership) are required to made by the shareholders in general meetings (or by written resolution). Therefore an agreement is important to fully determine the basis for important decision making, to restrict the power of the directors where necessary and to provide protection for the parties involved in the ownership of the company against the actions of the others, whether minority, majority or equal shareholders.
4) As opposed to articles of association which is a public document made available at Companies House, the shareholders agreement will remain private and confidential and will not be open to view by others such as creditors or non-member employees.
5) Having a shareholders agreement is a cheap way to minimize any potential for business disputes between owners by making it clear how certain decisions are made and also by providing a framework and procedures for dispute resolution.
6) The existence of a shareholders agreement can assist in raising finance from banks or creditors and also demonstrates the stability of the business to other potential partners.
7) It prevents situations where changes in one shareholder’s personal circumstances can have an effect on the company or other shareholders within the company, safeguarding each shareholder’s financial interest in the company, and the interests of the shareholders’ families in the event of the death of a shareholder.
8) A shareholders agreement protects the rights of minority shareholders and the investment value of their shareholding. Without an agreement, majority shareholders may force issues that are not in the minority shareholders’ interests. Once in place a shareholders agreement can only be amended with the agreement of all of the shareholders whereas the company’s articles of association can be changed by a 75% majority meaning that a shareholders agreement provides better protection for minority shareholders
Procedure
What are the benefits of creating a shareholder's Agreement?
There are various advantages to creating a shareholder's Agreement. Those are as follows:-Distinction of Authority
A shareholder's Agreement clears the authority in India. It also distinguishes the standing of a shareowner, and the license you stock. It is because the issuer of such shares symbolizes the risks and power for all. Also, it arbitrates as a governor of the interaction between all big and small shareholders in a company.Allows Amendments
A shareholder's Agreement enables the correct conditions for constructing amendments to the company's constitution. It is suitable for 'medium and small-scale' businesses that do not wish to officially change the whole constitution whenever small changes are essential to be made from time to time basis.Protection of Minority
Any company might have a minority and a majority shareholder. A shareholder's Agreement states the role and protects the rights of minority shareholders in a company.Easy Purchase of Share
A minority shareholder will have access to purchasing shares from other shareholders just like a majority shareholder.Control Achievement
A shareholder's Agreement will ensure that shareholders have a legal association with the company, including setting or modifying rules and guidelines.Care for Positions
Shareholder's Agreement safeguards the position or roles of shareholders, within a company, are protected.Shareholder Restrictions
Restrictions on matters that can be decided by shareholders can be included in the Agreement.Safeguard Privacy
As the Article of Association of any company is made public, the terms of shareholders are kept private always.Contents
Contents for Shareholders Agreement
- Name and details of parties
- Date of the agreement
- Purpose of the agreement
- Distribution of shares
- Management and control
- Shareholding (before and after)
- Confidentiality Clause
- Dividend
- Director’s loan (if any)
- Penalties and remedy for non-compliance
- Provision for transfer of shares
- Shareholder's rights and duties during the dissolution of the company
- Signatures of parties
Why not just change the company's constitution?
There are lots of things commonly found in a shareholders agreement that you could include in the company's constitution. However people often choose to use shareholders agreements, rather than amending the company's constitution because:
- a constitution can only be changed by a special resolution of shareholders (75%), whereas people may often want to allow changes with the agreement with some other proportion of shareholders (higher or lower); and
- Although shareholders agreements usually relate to the rights and obligations of all shareholders in the company, sometimes key shareholders may want to agree between themselves how some issues in the company will be dealt with but don't want that agreement with all shareholders. The constitution applies to all shareholders, and is available to all shareholders, whereas a shareholders agreement can apply to (and be made available to) as many, or as few shareholders as you like.
What types of things does a shareholders agreement cover?
A shareholders agreement usually will cover a range of areas relevant to the overall operation and ownership of the company, such as:
1. the nature and objectives of the business;2. how decisions will be made;
3. when shares in the company can be issued or sold; and
4. How disputes will be resolved.
Although this may sound simple, shareholders agreements are usually fairly detailed documents as they cover a range of different scenarios.
FAQ
FAQs on Shareholder's Agreement
It's just that the Corporations Act, shelf company constitutions and the general law were not developed with your specific circumstances in mind. Therefore they may not deal with issues that are important to you, either in the way you would like, or at all.
- They want certainty about what will happen in various circumstances not covered in a standard 'shelf company' constitution.
- They wish to deal with things differently from the way they are addressed in the constitution or under the Corporations Act.
- They wish to address things that aren't covered by the company's constitution or the Corporations Act. (For example, investors and other minority shareholders might want specific protections.)
- They like the convenience of having their key rights and obligations set out in a single document.