Legal

Shareholders Agreements - The Fundamentals A shareholders' agreement is a private contract between some or all of the shareholders of a company, and often the company itself. This agreement will typically govern the ongoing relationship between the parties and may set out how the company is to be managed and controlled.

What is a shareholders’ agreement?
A shareholders’ agreement is an agreement between shareholders and sometimes the company. The basic concept of a shareholders’ agreement is to set out certain aspects of how the company is to be governed and operated and to provide for respective rights and obligations of shareholders as between each other. The principal advantage of entering a shareholders’ agreement is legal certainty for the parties. If at some point in the future a dispute arises between the shareholders, a well drafted shareholders agreement will set out how such a dispute is to be dealt with. To protect minority shareholders the agreement will generally cover a wide range of topics which we will look at in more detail below.

Matters to be dealt with by a shareholders’ agreement could alternatively be inserted in the company constitution, however this document will be in the public domain through the CRO. For this reason, a shareholders’ agreement is often preferred as it keeps commercially sensitive and other information out of the public domain. Furthermore, a constitution will only be binding on a shareholder in their capacity as a shareholder. A shareholders’ agreement allows for the imposition of rights and obligations on the shareholders. This can be particularly important in smaller companies where shareholders may be directly involved in the running of the business.

Key provisions to be considered

The Business of the Company and its Management.

A shareholders’ agreement should describe the business the company is to carry out. It will usually outline the type of business the company can undertake and the parameters in which it must work.

Limitations and Restrictions on Management

Minority shareholders will often seek protection in relation to certain business decisions by the imposition of restrictions in the shareholders agreement. For example, a minority shareholder may insist that certain decisions such as borrowing cannot be made without the consent of some or all of the shareholders. The shareholders agreement may also provide for the appointment of a director to the board by minority shareholders.

Rights and Obligations of Shareholders

The agreement should clearly disclose the respective shareholding of each shareholder and any funding obligations on the shareholders. If a shareholder is to be employed by the company, the agreement should make reference to this however, a separate employment contract should also be prepared and executed by the parties.

Distribution Policy

It is vitally important that a distribution policy is put in place. The policy should be agreed and set out in the shareholders agreement. The policy should be clear on the terms under which a dividend payment will be made, whilst ensuring the company has sufficient resources to continue to operate.

Covenants Regarding the Sale of Shares in the Company

Provision for the sale of shares should also be addressed in the shareholders agreement.

  • Tag Along, where a shareholder wishes to sell shares, he/she must obtain an offer for one or more of the shareholders on the same terms
  • Offer Round, where the shareholders agree not to sell any shares to a third party without first offering the shares for sale to the other shareholders in the company.
  • Lock In, it may be agreed that one or more shareholders will not sell shares without the consent of one or more other shareholders for a period of time. 
  • Drag Along, in the event that one or certain specified shareholders wish to sell their shares in a company, they can compel other shareholders to sell their shares on the same terms.

Restrictive Covenants

In order to safeguard the business, covenants are sometimes incorporated into a shareholders’ agreement restricting the shareholders from competing with the company. In particular, restrictions could be placed on shareholders for up to a period of 2 years after selling their shares from:-

  • Competing with the business;
  • Soliciting the staff of the business;
  • Soliciting customers and suppliers of the business.

Careful consideration must be given to any such restriction imposed in the shareholders agreement. If the restriction is too broad, it may be deemed void.

Valuation of Shares

Consideration should be given to how shares are to be valued in the event of a shareholder selling his/her shares in the company. If provision has been made for this event in the shareholders agreement, it is likely to reduce the possibility of a conflict.

Dispute Resolution

Of vital importance in a shareholders’ agreement is a dispute resolution clause. This pre-determined method of resolution of a dispute could save significant cost to the business. 
Legal advice should always be obtained when preparing a shareholders’ agreement. Every company will be different and the agreement needs to be specifically tailored to the needs of the particular shareholders.

If you would like further information in relation to any of the above please contact Brian Kirwan at brian@amoryssolicitors.com, or telephone: 01 213 59 40 or your usual contact at Amorys.