Fletcher Law’s Guide to Shareholders Agreements

A shareholders’ agreement (SHA) is a contract between some or all of the shareholders of a company. Pursuant to an SHA, shareholders agree to regulate the exercise of some of their rights as shareholders of a company.

Why is it beneficial to have a SHA?

As a shareholder, there are a number of reasons why you might consider putting in place an SHA.  These include:

  1. It provides shareholders with a framework to address material issues in relation to their rights and the running of the business.
  2. From the perspective of minority shareholders, an SHA can serve as an effective means of protecting their interests. By way of example, the SHA can set out a list of “critical matters” which require the approval of all
  3. A well prepared SHA can assist shareholders avoid or minimise disputes (and the costs associated with disputes) through the adoption of a predetermined dispute resolution process.
  4. The SHA can document an exit strategy for some or all shareholders. This provides the shareholders with certainty of their rights in the event of one or more parties seeking to dispose of their shareholding.

But the company already has a constitution

A question commonly raised is why is an SHA required in addition to a company’s constitution?  Generally speaking, a constitution sets out broad provisions relating to the governance of the company, whilst a SHA is a more specialised document tailored to the particular purposes of the company, the nature of its business and the wishes of the specific shareholders who are party to the agreement.  To the extent that an SHA and constitution deal with similar issues, it is common for the SHA to prevail to the extent of any inconsistencies.

Matters that should be addressed

A well prepared SHA is likely to cover the following matters:

  1. How will the company be governed?
    An SHA should set out the management structure of the company including the manner in which directors are to be appointed.  It is not uncommon for shareholders to seek the right to appoint of one or more directors to the Board of the company to represent their interests.
  2. How decisions are to be made?
    It is prudent for the shareholders to agree on those decisions which will require their unanimous consent.  Matters which are often decided by unanimous approval include the removal directors, the issue of additional shares, disposal of major asset or undertaking and the winding up the company.Further, shareholders should also identify matters which require a certain special majority (for example, 75%) or a simple majority.  Such matters may include the company incurring spend over a certain threshold, entering into contractual arrangements above a certain threshold and declaring or paying dividends.
  3. Issue of shares
    A well prepared SHA will usually contain provisions entitling existing shareholders to take up new share issues in the first instance before further shares are issued to third parties (subject to certain exceptions). The SHA should also generally set out the process to be followed by the company when it is seeking to raise additional share capital.
  4. Transfer of shares
    The SHA should contain prescriptive provisions dealing with how shares in the company may be transferred by an existing shareholder.  Similar to an issue of shares, the parties commonly agree that no shareholder can transfer its shares without the prior approval of some or all of the other existing shareholders.  Existing shareholders are likely to seek a first right to purchase any shares which are proposed to be transferred to a third party.
  5. Resolving disputes
    A dispute resolution regime in the SHA can save parties to a lot of time, money and inconvenience in the event of dispute.

How we can help

Notwithstanding the above guidance, each SHA must be specifically tailored having regard to the relevant business and the intentions of the parties.  Fletcher Law would be well placed to guide you through the process and assist with the preparation of an SHA which suits your needs.