Importance of Shareholders Agreements

Among other significant documents of a company, a shareholders agreement usually is the most vital. A shareholders agreement unites a company with the shareholders and sets the solutions to unexpected circumstances that may arise in the future. It encompasses the privileges and duties of the shareholders and also guides the management of a company by its directors and shareholders.

The shareholders’ agreement of a company operates in alliance with the company’s articles of association. Nonetheless, where a company’s articles of association conflict with the provisions of the shareholder’s agreement as it relates to third parties, the articles prevail. The shareholders’ agreements bind no other party than the shareholders themselves.

The privileges and duties of the shareholders of a business are made plain and open by a shareholders’ agreement. This can result in a more productive corporation, lowering the likelihood of disagreements. Prospective investors will be interested in knowing that the business has a shareholders agreement for this reason, too.

Why shareholders’ agreements are important

1. The nature of the company’s business

Even though the articles of association of a company would contain the nature of the company’s business, the shareholders’ agreement also reinstates this to cause no future confusion or disagreements.

2. Company’s operations 

This would clarify the company’s routine operations. This involves the process of choosing the company’s business sector, making financial arrangements, and paying directors as well as financing the business.

3. Decision making 

The shareholders’ agreement would specify which actions require shareholders’ approval and which others can be taken by directors. In general, shareholders’ approval is required for critical matters including director compensation, share issuance to third parties, and significant purchases.

Particular matters require special resolution while some require ordinary resolution by shareholders to be authorized. The shareholders’ agreement states in clear terms the matters that fall into the two categories. A special resolution matter needs 75% of votes cast in favour while an ordinary resolution needs 51% of votes cast in favour.

4. Financing

A shareholders agreement usually specifies how the business can raise money, whether through equity, debt, or other sources.

5. Capital contributions

This specifies the capital contributions that the shareholders should make as well as how they should be made in the future.

6. Resolving disputes

When the shareholders cannot agree on a decision, a shareholders agreement may incorporate a method for breaking the dilemma. This is very essential if a company has a balanced number of shareholders. 

The name of the brand, marketing scheme, investors, trend of the business, and the possibility of a merger with another company or selling the company are all examples of issues that are crucial to the running of the business. By defining how disagreements on essential elements of the organization will be resolved, a shareholders agreement would act as a buffer against these conflicts.

7. Issuing of new shares

Pre-emption rights are typically included in a shareholders agreement, requiring that any additional shares be given to current owners before they are offered to outside investors. This gives shareholders the chance to maintain their holding in the company.

Situations in which a corporation can allocate new shares without following the pre-emptive protocols are oftentimes outlined in a shareholders agreement.

8. Sale of shares

In general, shareholders are permitted to sell their shares to anyone they choose, even to a third party. Pre-emptive rights for the purchase or transfer of shares, which call for the shares to be given to current shareholders before being sold to third parties, are usually included in a shareholders agreement.

Various examples where the shareholder may transfer shares without following the pre-emptive protocols are frequently outlined in a shareholders agreement.

9. New shareholders

Any new shareholder would be guided by the requirements of the shareholders’ agreement and abide by them.

Before becoming a stakeholder of the company, the shareholders’ agreement will typically stipulate that the new shareholder must enter into an accession deed.

10. Drag-Along clause 

This clause permits a major shareholder to compel minor shareholders to trade out their shares at the precise rate that the major shareholder would be selling if the major shareholder wishes to sell their shares to a third-party buyer. This effectively enables a prospective investor to purchase 100% of the company instead of a majority interest, which could be more appealing to the buyer.

11. Tag-Along clause

If a major shareholder plans to trade their shareholdings to a third-party buyer, this clause enables minor shareholders to trade too.

This makes it possible for minor shareholders to sell at the exact rate as the major shareholder, preventing minor shareholders from losing the value of their shares.

12. Incapacitation or Disability

If a shareholder becomes ill, disabled, or incapacitated, they will be unable to serve or contribute to the company’s revenue.

If a shareholder is unable to contribute to the business for an extended period, a shareholders agreement could solve this by allocating the shares owned by this individual, following a set regulation for this situation that is deemed acceptable by the shareholders.

13. Divorce 

When a shareholder divorces, their shares become part of the family’s net property to be divided with their spouse. Because of this, their former spouse can gain ownership of the company’s shares during the divorce.

A shareholders agreement would prevent this by prohibiting an ex-spouse from receiving the shares in the event of a divorce.

14. Death

If a shareholder in a business contract dies, their shares, as part of their assets, may be given to their beneficiaries or next of kin.

A shareholders agreement would prevent this by keeping the shares from becoming part of the assets of the deceased shareholder. Instead, the other shareholders would be offered the option to acquire the shares while also providing the family with cash the same worth as the shares, rather than the shares themselves.

Conclusion

The articles of association of a business are typically a standardized document that restates what is asserted by the provisions of the Companies and Allied Matters Act and how a company seeks to function. 

A shareholders agreement allows a business and its shareholders to create a governing structure that is specific to the business and covers rights and obligations outside of those outlined in the articles of association. It should be noted that the company’s articles are public documents that can be accessed by anyone, but the shareholders’ agreement is private to the shareholders of the company only.

Frequently Asked Questions (FAQs)

Do the Shareholders declare dividends in the company?

No, only the directors of a company can declare dividends in the company

What are reserved matters?

Reserved matters are matters retained for the consent of the shareholders or a part of them before they are effected.

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Richard Okoroafor

Richard Okoroafor

Richard is a brilliant legal content writer who doubles as a finance lawyer. He brings his wealth of legal knowledge in corporate commercial transactions to bear, offering the best value that exceeds expectations.

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