Advantages and Disadvantages of putting a shareholders agreement in place
A shareholders agreement generally will regulate the relationship between the shareholders and detail how the company will be managed. As we will see a shareholders’ agreement provides an opportunity for shareholders to obtain additional rights or expand upon their existing rights. Each shareholders agreement should be tailored to suit the particular circumstances of the company and its shareholders.
The following briefly sets out particular advantages for various parties of entering into a shareholders’ agreement
- Increased access to information relating to the company. Many people are unaware of how little information they are entitled to by law when they are simply a shareholder in a company.
- A contractual right to nominate and have appointed a director to the board of the company. Parties can often agree to appoint someone to the board of a company at the outset of the relationship without realizing that the company, usually acting through the majority shareholders, may remove that director by special resolution.
- Pre-emption rights on new share issues.
- Offer-round rights on a share transfers.
- ?Tag along rights. If another shareholder is selling his shares in the company, the minority shareholder shall be entitled to have his shares also purchased by the purchaser. This is a significant protection to a minority shareholder who is generally less likely to find a buyer for his minority shareholding and may also not be in a position to purchase the majority shareholder’s shares at the price that they are being sold to a third party.
?Where this provision is included and the majority shareholder receives an offer for all of the shares of the company, the majority shareholder can force the remaining shareholders to also sell their shares to the purchaser. This is particularly useful where the purchaser only wants to buy 100% of the company, which is usually the case.
- Privacy. A private company must file their articles of association with the Companies Registration Office, which is then available to the public to obtain. The advantage with the shareholders agreement is that it does not have to be filed with the Companies Registration Office and so the contents are private.
- Dispute Resolution. Despite everyone’s best intentions, day to day running of the company can lead to business disputes between shareholders and directors. Disputes can be time consuming and costly for the company. A SHA is an inexpensive way to minimise any potential for disputes as it provides a framework and procedure for dispute resolution by outlining how certain decisions are to be made. This prevents the use of shareholders relying on draconian measures as a way to settle disputes and ensures that everyone’s attention and focus is on promoting the success and development of the company.
- Non-Compete. It is to the benefit of all parties that a shareholders agreement contains non-compete provisions preventing a shareholder setting up a competing business while they are a shareholder in the company. This would also usually extend for a period of six to twelve months from which a shareholder no longer hold shares in the company.
- Deadlock: During the life of the company it can be expected that shareholders and directors will not see eye to eye on certain matters. The inability to reach a consensus on key matters will result in a deadlock which may bring the company’s business to a standstill. A SHA can mitigate this risk by containing a deadlock provision to facilitate a quick resolution which can include mechanics for the parties to buy each other out. It is very difficult to deal with the resolution of any deadlock through articles of association, and a SHA is therefore advisable.
Shareholders’ agreements should be reviewed regularly to check that it still operates in the way the company and shareholders wish it to. Whether you have a shareholders’ agreement in place already that needs reviewed or require one
