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Shareholder agreements

As with any organisation and group of people the owners/shareholders of a successful company need to work together to achieve the best outcomes. However, just relying on goodwill is not a guarantee for success and on-going sustainability, particularly when circumstances change. Whilst all companies are required to have a constitution, a shareholders agreement also serves a very important function, particularly where shareholders are not members of the same family.

The following types of events are typically covered by a shareholders agreement:

  • Death or incapacity of a shareholder
  • Bankruptcy of a shareholder
  • Shareholders selling and acquiring equity interests

The exact terms of the shareholders agreement depends on the requirements of shareholders but typically it covers restrictions on who shares can be sold to and gives options to existing shareholders to acquire shares. They are particularly beneficial when a shareholder dies, especially for the surviving shareholders and business management. In the absence of an agreement, the shares held by the deceased are transferred according to the terms of their will. This may result in the existing shareholders finding themselves in business with someone who knows nothing of the business and having unrealistic expectations.

Other common provisions included in shareholders agreements typically include:

  • remuneration of directors
  • dividend policy
  • management of external borrowings
  • avoiding directors conflict of interest
  • interest on loans to/from shareholders
  • calls of additional capital from owners
  • how to manage disputes and deadlocks in shareholder voting.
  • the extent to which external funding is used e.g. insurance

The agreement should protect the interests of all parties to the agreement. It should also define individuals rights, duties and obligations. Without an agreement, there is great potential for misunderstandings, disputes and legal action. It is far better to create agreements in advance when the shareholders’ dealings are harmonious.

Saward Dawson can assist you in determining your strategies and implementation of your shareholders’ agreement.

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