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March 18, 2019

Shareholders’ agreements 101

A shareholders’ agreement is often explained as a document regulating the relationship between the shareholders of a company. However, there is much more to a shareholders’ agreement. Putting a proper shareholders’ agreement in place may ensure that potentially difficult situations in the future can be handled and resolved with ease

What is a shareholders’ agreement?

Read in conjunction with the Memorandum of Incorporation (“MOI”) of the Company, a shareholders’ agreement provides the parties (shareholders of the Company) with clear guidelines that set out the do’s and don’ts. It forms part of the roadmap which all shareholders in a company should have, to determine the management of the company and what procedures should be followed in certain situations.

What is the objective of a shareholders’ agreement?

As stated above, a shareholders’ agreement provides shareholders with guidelines and forms part of the foundation for governance of a company. It is important to ensure that a formal shareholders’ agreement address, as a minimum, the following:

  •  the company structure and day-to-day management of the business;
  •  the composition of the board of directors and role they will play in the company;
  •  funding requirements of the company and ranking order when funding is needed; and
  •  forced and voluntary sale of shares by shareholders.

What are the important factors to consider when signing a shareholders’ agreement?

– Decision making and authority

It is general practice that shareholders would only intervene in decisions which are considered as fundamental decisions. The day-to-day decisions and general management of a company are taken by the board of directors due to the practical implications which may be caused when shareholders’ approval is required for all decisions. Matters which must be referred for shareholders’ approval is generally known as “reserved matters” or “specially protected matters” and will be agreed upon between the shareholders during the drafting of the agreement. What kind or type of matters will be treated as such, will depend on the nature of the business.

– Pre-emptive rights

Pre-emptive rights are included to protect the remaining shareholders when one of the shareholders wish to sell or transfer their shareholding in the company. In terms hereof the existing shareholders will be entitled to purchase the shares from a selling shareholder pro rata their respective shareholding held in the company. This will prevent situations where a shareholder exits the company by selling his/her shareholding to a specific existing shareholder without offering it to all existing shareholders or selling his/her shareholding to a third-party.

– Funding requirements

Irrespective of whether a company immediately needs to source funding, it is important to outline how funding will be sourced. Funding can be obtained from retained income, shareholder loans, third-party investors, commercial banks etc. Therefore, it must be set out clearly how and from whom funding will be sourced as well as in what order.

– Exiting provisions

At some point, one or more shareholders will exit the company. This will either be by a voluntary or forced sale of shares, whatever the case may be. It is necessary to ensure that certain exiting provisions are built into a shareholders’ agreement. Exiting provisions will include situations/circumstances which may lead to the exit of a shareholder, the method/s which will be used to determine the value of the exiting shareholders’ shareholding at that stage etc.

– Deadlocks

Depending on the number of shareholders in the company, the parties should make provision for situations where a deadlock may arise. It is important to ensure that should a deadlock arise; the shareholders’ agreement contains clear guidelines to what procedures must be followed to resolve the deadlock.

When you decide to invest in a company with other shareholders, it is important to ensure that your investment is as secured as possible. Although there are a lot of variables which cannot be controlled by corporate documents, one must at least ensure that the bases which can be covered by those documents are properly covered to mitigate risk.

Should you have any uncertainty whether you are covered properly by the shareholders’ agreement in place, or considering putting something to paper, kindly contact ASL Advisory to discuss your situation with one of our experts.