When establishing a company, or even buying into an existing company, many individuals opt for a basic set of agreements. In particular, the company's Memorandum of Incorporation and the Shareholders Agreement. However, opting for your more basic agreements will not bode well should disputes arise or a lack of governance within the company. In this short article, we will unpack the importance of a shareholder's agreement and why it is often considered the most important document within the organization.
Arguably the most important document within the organization, the shareholders agreement is a contractual agreement between the company and its shareholders. It provides for the rights and obligations of shareholders but also affords protection to minority shareholders. The Agreement further governs how the company is run by not only the shareholders but also the board of directors of the company. While the management of the company is also regulated within the company's memorandum of incorporation, the shareholders agreement will prevail in any instance of conflict between the two company documents. The shareholder's agreement is thus seen as the toll from which the shareholders shall implement and maintain a governance framework (see our articles on the Importance of Corporate Governance).
What needs to be included in a Shareholders Agreement?
Shareholders are faced with big decisions in terms of the provisions that will be included in the Agreement, as this can be a make it or break it scenario when the company needs to make decisions at a later stage. There are numerous provisions that should be included in the shareholders agreement including, but not limited to, the following key provisions:
- Voting Rights: The Agreement will outline the decisions that are made and by whom. Whilst the general day to day decisions are made by the board of directors, it must be approved byt the shareholders by resolution. Furthermore, certain decisions are reserved solely for the shareholders of the company. This ranges from the issuance of shares to third parties and director remuneration. The Agreement goes further to indicate the number of votes that are required to pass resolutions. Whilst ordinary resolutions require 50% or more, special resolutions are often 75% or more. However, this is in the discretion of the shareholders with the voting rights for special resolutions often changing to ensure minority protection.
- Financial Arrangements: The Agreement should essentially outline how the company will raise funds. This is often through funding by the shareholders themselves, equity, debt or alternative means.
- Tag-Along: This provision is included in the agreement to afford protection to the minority shareholders in instances where the majority shareholder intends selling their shares to a third party. The tag along clause enables the minority shareholder to sell their shares on the same terms as the majority shareholder.
- Pre-Emptive Rights: Although shareholders are generally free to sell their shares to whoever they wish, shareholders may opt to include a provision for pre-emptive rights for the sale of shares. Essentially, the shareholder would be required to first offer the shares to the existing shareholders before offering the shares to an external third party.
The above provisions are but a mere few of the provisions that should be included in your shareholders agreement to ensure the management of the company and decision-making is appropriately governed. However, each shareholders agreement will differ from company to company, dependent on the structure of the shareholding as well as the shareholders themselves. Companies, particularly start-up companies, should therefore take the drafting and concluding of the company agreements seriously and seek professional assistance herein. In seeking professional legal advice herein, your company will be comfortable in the knowledge that its company documents cover all bases and the necessary mechanisms are in place to deal with all types of scenarios. Should you or someone you know need assistance with drafting your company agreements or for your company secretarial needs contact our team at SchoemanLaw today.
Originally published 6 April 2022
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.