Shareholders Agreements – a brief legal overview

What is a Shareholders Agreement?

A shareholder agreement commonly refers to a document that regulates the operation of a company, the roles and responsibilities of shareholders, directors and prescribed officers.

Shareholders Agreement for your new business

Shareholders Agreements are more often than not viewed in isolation from the Companies Memorandum of Incorporation (MOI) and without consideration of all the factors a new business owner should consider when establishing a new business. (Read more of the “Stillbirth of a New Business”)

Warning when buying business documents online

The practice amongst new business owners that form takes precedence over substance is evident from a myriad of websites “selling” standardised and unsuited shareholders agreements and MOIs to unsuspecting clients at unbelievable prices. I guess it gives credence to the adage “you get what you paid for”. Standardised MOIs and shareholders Agreements are stripped of all substance and usually ends in costly litigation.

A Shareholders Agreement should reflect the agreement that was reached between the shareholders and should not constitute a manual drafted by an unknown entity that prescribes their business relationship. A Shareholders Agreement and MOI should also co-exist harmoniously as conflicting provisions may have dire consequences.

Both these documents have an important effect on the future relationship between shareholder and directors and plays a significant role in the governance and governance structures of a company.

What should a Shareholders Agreement contain

A Shareholders Agreement will typically contain provisions that regulate the roles and responsibilities of the stakeholders, loan accounts, voting, powers and authorities to bind the company, the appointment of directors, access to documentation; distribution of dividends, operating bank accounts, etc. 

Special mention should be made of pre-emptive conditions

A pre-emptive condiction regulates the sale of any shares by any shareholder and usually restricts these transactions both in respect of the identity of the seller as well as the price of the shares. Failing to properly deal with the same may very well result in you ending up with an unwanted business partner or being squeezed out of “your” business.

The importance of a professional and experienced advisor cannot be over-emphasised. You may very well end up, thanking yourself for spending a little more to protect your interest.