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So, you’ve just started a business and it’s full steam ahead. In all the excitement, you and your business partners forgot to put anything in place regarding how the business is to be managed and what happens when it all hits the fan? You’ve heard that you should get a Shareholders' Agreement – but what is that and what should it include?
Together with your company’s constitution, a Shareholders' Agreement provides the foundation for the corporate governance of your business and outlines what a shareholder can and cannot do. It also sets out the shareholders’ rights and obligations and their role in the management of the company.
Even if your company is not planning to raise any capital immediately, it is important that a Shareholders' Agreement is implemented as soon as it appears that there may be more than one shareholder.
Your agreement should outline:
Are decisions to be made by the Board or the Shareholders?
The Shareholders' Agreement should set out matters that are reserved for the board and those matters that will require shareholder approval. It will also set out the level of the majority required to pass a particular resolution.
Decisions around the day-to-day management of the company are usually reserved for the Board and decisions around any fundamental matters, such as the issuing of new shares, borrowing or providing guarantees, remunerating the directors and any agreement between the company and one or more of its shareholders, are usually reserved for resolution by the shareholders.
What if I want to sell or transfer my shares?
The Shareholders' Agreement should outline when, and under what conditions, a shareholder may transfer, sell or assign its shares. For example, a provision may require a shareholder to obtain prior written consent from all remaining shareholders before it can sell or transfer any or all of its shares. This protects existing shareholders from jointly owning a company with an unknown third party.
What if the Company wishes to issue more shares?
The Shareholders' Agreement should include pre-emptive rights which require the company, when they wish to issue more shares, to first offer to sell to each current shareholder a certain number of new shares, so that a shareholder can maintain their percentage ownership in the company.
What happens when the relationship between the Shareholders breaks down?
Shareholders' agreements contain provisions about how the relationship between shareholders may come to an end, and how and when shares can be transferred. Sometimes, this relationship may come to an end because an ‘exit event’ has occurred.
An ‘exit event’ will usually include things like: where the company sells a substantial asset, a shareholder sells a substantial number of shares, the company merges or is acquired by another company; the company goes into liquidation, or a Director dies.
The Shareholders' Agreement will typically address how an exit event can occur, what this means for shareholders, and how to determine the price of shares if there is a transfer.
Whether you own a big business or a small business, a Shareholders' Agreement will probably be the most important document you implement. Don’t leave big decisions to chance. If you run a business and don’t have a Shareholders' Agreement already in place, give businessDEPOT Legal a call to arrange a no obligation consultation to discuss how we can help.