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Shareholders Agreement

A shareholders agreement should be seriously considered where there is more than one shareholder in a company. Resolving a dispute or exiting the company could become a very expensive and lengthy exercise for the shareholders, as well as for the company.

A shareholders agreement is an agreement between the shareholders or partner of a company which complete, regulate or modify the relationship between shareholders and sets out what is going to happen in certain major events.

A well drafted shareholders agreement should cover off what happens when there is a dispute between shareholders and avoid have to litigate to resolve a matter. These agreements can contain provisions regarding decision making, profit distribution policies, voting rights, restrictions to selling shares or participation quotas, among others. Following, you will find examples of provisions that a shareholders agreement may contain:

Selling shares – a shareholders agreement will set out when a shareholder can sell its shares and the corresponding procedure.
Lock up clauses – this is where there is a restriction on selling shares for a certain period.
Right of First Refusal (RFR) – this provides that where a shareholder wishes to sell its shares that it must first offer its shares to the other shareholders.
Call options – where one shareholder can force another to sell its shares to him.
Put options – where one shareholder can force another shareholder to buy its shares.
Drag Along – this is where one shareholder (usually the majority shareholder) wants to sell its shares to a third party, and can force the other shareholders to sell its shares to that third party.
Tag Along – this is where one shareholder (usually the majority shareholder) wants to sell its shares to a third party, and the other shareholders can force that shareholder to make sure that the third party purchases their shares as part of the deal.
Decision making – When, where and how are shareholders and directors meetings to be held? How many shareholders and directors must be at a meeting in order for decisions to be made? What percentage of votes are required to make certain decisions?
Directors – how many directors can a shareholder appoint? Who can remove a director? Are there any limitations as to who can be appointed as a director?
Insurance – a shareholders agreement may contain provisions regarding what insurance the company must take out for instance, life insurance over the life of a shareholder to fund the purchase of that shareholder’s shares by the other shareholders.
Restraints – provisions which prevent a shareholder from competing with the company, both during and after the period during which they are a shareholders.
Shareholder advances – the agreement can set out what funding is required from shareholders, how this will be repaid by the company and what security the company will give in return.
Distributions – how will distributions be calculated and when will they be payable, are any loans to be paid before distributions are made?
Senior employees – is shareholder approval required before senior employees can be appointed?
Shareholders as employees – where a shareholder is an employee, the agreement can set out the terms on which the shareholder is employed.
Deadlock – ¿what happens when the shareholders cannot agree? How is a dispute to be resolved – arbitration, mediation?, What if there is deadlock?

It is important to state that there is no such thing as a one sized fits all shareholders agreement. We can help you tailor a shareholders agreement to fit the specific circumstances of your company.