Looking to start a new company with co-investors? Seeking seed capital from potential investors? Wanting to safeguard the succession of your company? Or just looking to protect your company’s value? Then you should be considering a shareholders’ agreement.
But what is a shareholders’ agreement?
A shareholders’ agreement is an agreement regulating a company’s relationships, rights, responsibilities and obligations owed to its shareholders. Or put simply, it’s a tailored agreement that guides shareholders as to what they can and can’t do.
A well drafted shareholders’ agreement can provide a proper corporate governance framework for running a business efficiently, avoiding future costly disputes, and providing a stable structure. This in turn makes a company more attractive to future capital investors.
One of the main attractions of a shareholders’ agreement is that it is tailorable to a company’s individual circumstances. This is important because a company’s constitution rarely accommodates the special intentions of the shareholders in respect of managing the business.
For example, what if your company begins to generate significant profits and you and your co-investors can't agree on how they should be applied. Do you take a dividend? Or should you reinvest them as working capital? Whatever the answer, a tailored shareholders’ agreement will provide a framework to assist in answering these questions.
What is in a tailored shareholders’ agreement?
A fully tailored shareholders’ agreement will address some or all of the following matters: share capital and management structure, appointment of directors, board meetings, voting rights, company financial accounts and reporting requirements, dividend policy, share sales, issues and transfers, tag and drag along rights, exit strategies, confidential information, shareholder restraints, warranties and dispute resolution mechanisms.
How many of the following key questions can you answer?
If you want to ensure that your shareholders’ agreement is fit for the needs of your company’s business and adequately addresses the above-mentioned matters, it is crucial that you understand, and can provide input on, the following key decisions:
- How many directors will be appointed to the board?
- Will shareholders that have more than a certain percentage of the issued share capital be entitled to appoint directors and if so, how many can they appoint?
- Will the directors be paid a director’s fee and if so, how will this be determined?
- Will there be a CEO or Managing Director?
- Is Director and Officer Insurance required to protect the company’s directors?
- How many directors need to be in attendance before a valid meeting can be held and is a certain shareholder appointed director required to attend?
- How many votes will each director have, or will the number of votes be proportionate to the total shareholding his or her appointing shareholder holds in the company?
- Who will the initial chairperson be, and will they have a casting vote?
- How will significant decisions of the company be made? For example, will they be made by ordinary resolution of directors (usually 50% approval) or by a special majority? If it is a special majority, what will be the approval threshold?
- Will the company financial accounts be audited?
- If the company issues new shares to shareholders, how long will it be until the surplus of unissued securities can be offered to third parties?
- Are shareholder anti-dilution rights required?
- Will there be drag/tag clauses to protect majority/minority shareholders? If so, what will be the minimum percentage a shareholder must have to be entitled to drag/tag along?
- If a default event occurs in relation to a shareholder (for example, a shareholder becomes insolvent or breaches a material provision of the agreement), at what price will the company buy back their shares, and how will they be valued?
- Will there be a restraint of trade clause restraining the shareholders from competing against the company? If so, how long will the restraint last, and over what geographic area?
- Will there be a dispute resolution mechanism and in what time frame must disputes be resolved, or is an expert’s findings preferred?
If you require assistance in answering any of these key decisions, please contact Trent Le Breton or Danton Stoloff from McCabes’ Corporate group. McCabes has extensive experience in advising a wide range of businesses (including start-ups) on shareholders’ agreements and on issues that may arise in relation to them, and also has expertise in drafting fully tailored shareholders’ agreements.