Do you have a Shareholders Agreement?

Do you have a Shareholders Agreement?

Introduction

Needless to say, many shareholders do not recognise the value of having a shareholders agreement in place until it is too late. Sometimes shareholders subscribe themselves to an agreement without having really paid much attention or without fully understanding what the agreement actually said at the time it was drafted – perhaps relying on a “standard” form or a template document which they flesh out themselves, essentially committing a form filling exercise.

A Shareholders’ Agreement is essentially a contract between the members of a company and, frequently, the company itself. All the usual principals of Contract Law apply. The basic purpose of a Shareholders Agreement is to provide for how the company is to be controlled and managed, the scope of the business, rights and obligations of the parties involved, exit strategies and perhaps most importantly to decide on how to best deal with issues that could become acrimonious in the future if not agreed in advance.

We strongly recommend to all our clients to have a Shareholders Agreement tailored to fit their needs and this is a service we provide. We are also able to deal with Shareholder disputes and all areas of commercial mediation. Shane Browne, Partner and Head of the Forensic Accounting & Litigation Support Department is an accredited Mediator and is a member of the MFI (Mediation Forum Ireland) – Panel of ADR specialists and Mediators.

Frequently, problems that arise between shareholders could have been avoided had they simply of had a better Shareholders agreement at the outset of the relationship.

A FEW MAIN POINTS OF ADVANTAGE;

Confidentiality

The Company’s Memorandum and Articles of Association are accessible to the wider public and are available for inspection through the Companies Registration Office (CRO). By contrast, a Shareholders agreement is a private document and is therefore a much more suitable vehicle to address sensitive or internal company issues (e.g.  Directors salary) that are not intended for public consumption.

Company Law

Company law and the standard Memorandum and Articles of Association of a company provide only basic rights to Shareholders. All Shareholders, regardless of their shareholding, have rights to attend and vote at general meetings, to receive certain information, participate in dividends when declared and to a return of capital plus surplus assets on winding up of the company. Company Law also provides for certain rights that correlate to the proportion of shares held. These are all very basic rights, the skeleton or the bones upon which all companies conduct themselves. On the other hand, a Shareholders Agreement can be seen as the flesh of the business, it goes further, it builds on the legal framework, it’s unique and specifically tailored to fit the needs of each Company.

Minority Interests

Company Law usually affords the bare majority (holders of more than 50% of the company shares) complete control over the affairs of the company including the power to fire the Directors at any time, declare dividends only when they wish and enjoy preferential salaries and bonuses. CompanyLaw only offers to protect minority shareholders from “oppressive” management by the majority and while an application can be made to the Courts to challenge same the difficulty is that it’s hard to definitively establish what might constitute “oppressive” management. Such a claim would have to withstand objective scrutiny and the expenses and relative risk involved in taking such a case is clearly a significant practical barrier.

A Shareholders Agreement can bolster the rights of minority shareholders and cover issues like increased access to information about the company or pre-emption rights on the transfer and issue of new shares so as to ensure their shareholding is not diluted. The Shareholders Agreement might even provide for rights to participate in the management of the company, a right minority shareholders do not normally enjoy under Company Law

Tag along rights –

A Shareholders Agreement can provide for “tag along rights”. This means that if a majority shareholder is selling his shares in the Company, the minority shareholder can also have his shares purchased by the same purchaser on the same terms.

Transfer of Shares –

The transfer of shares can generally be vetoed by the Directors the Company. A Shareholders Agreement can address the terms upon which shares can be transferred and ensure a fair price is paid.

Dividends

A Company need not in fact not pay dividends, unless the Board of Directors authorises it. Again, a Shareholders Agreement might record some kind of understanding or agreement on payment of dividends.

Finance

Another important function of a Shareholders Agreement might be to provide for future financing. Finance is the life’s blood of the business. A Shareholders Agreement can impose obligations in relation to providing equity, loans or to guarantee company
debt.

Greater Binding Effect

The Company’s Memorandum and Articles of Association can only bind a Shareholder in his capacity as a Shareholder. The Company’s Memorandum and Articles of Association may also be amended by the passing of a Special Resolution. By contrast a Shareholders Agreement is subject to all the usual principals of Contract Law and cannot be amended unless agreed between all the parties thereto.

Dispute Resolution
The real advantage of having a Shareholders Agreement is that is can avoid disputes and save on time and costs. The Shareholders Agreement records the intentions and understanding of all the parties involved at the outset. Even where a dispute does still arise, a Shareholders Agreement can set out certain steps to make sure same is resolved as quickly, painlessly and in the most cost efficient manner.

These are just a few of the ways in which a Shareholders Agreement can address matters not encompassed by Company Law /Memorandum and Articles of Association or simply not meant for public consumption.

For a consultation with a member of our team, please contact Shane Browne, Manager of the Forensic Accounting & Litigation Support Unit.

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