A shareholders agreement regulates the relationship between the shareholders of a company. It will provide a framework within which the company is managed and exit routes for shareholders (for example transfer of shares upon sale or “bad leaver” provisions).
It pays to discuss and put in place procedures early in the relationship so that any later disputes can be dealt with in a manner which hopefully avoids potentially stressful and costly litigation but it is rarely too late to write one, even if your company has been running for some time.
A shareholders agreement is particularly important if there is an even number of shareholders, each with equal rights because this can lead to deadlock - where the shareholders cannot agree on key issues of company business but there is not a sufficient majority to pass a resolution to drive the process forward. A shareholders agreement will typically provide a mechanism to overcome such problems.
Owners with less than 50% of the voting shares of the company will be considered a minority shareholder. Unless there is the protection of specific clauses in the company’s Articles of Association, shareholders having 75% or more of the voting shares of the Company will enjoy almost complete control of the company and the board of directors.
Companies legislation provides limited protection to minority shareholders whose position has been prejudiced but this requires recourse to the courts so may be expensive and uncertain. To avoid these difficulties, minority protection can be provided for within a shareholders agreement.
A shareholders agreement should often be prepared in conjunction with succession planning to ensure business continuity for the company itself and its shareholders. This is particularly important for owner-managed businesses where the directors are often the shareholders too.