A shareholders agreement is a binding contract between all or some shareholders of a corporation which determines shareholders' rights, privileges, responsibilities, restrictions and protections. Its main aim is to protect investments, secure fair relationships among shareholders and provide guidelines for the running of the company.
It depends. A 'supremacy clause' in the shareholders agreement, which provides that in the event of conflict the provisions of the shareholders’ agreement would prevail, gives priority to the shareholders agreement. However, in all other cases the articles of association normally prevail.
Although not a legal requirement, it is highly advisable to have a shareholders agreement in order to safeguard stability, clarity and certainty in the company. They aim to minimise potential disputes, protect minority shareholders, control the transfer of shares and, by and large, contribute to the smooth running of the company.
Normally a shareholders agreement contains some consideration for each party, such as the issue of shares or agreement to restrictive covenants. Where this consideration exists, a binding contract is formed. If there is no consideration contained in the document, it can be executed in front of witnesses as a deed and would still be legally binding.
The agreement only binds the shareholders who sign it. This means that if shares are sold the new owner will not automatically be bound by the agreement. To avoid this situation the agreement should contain a clause requiring the seller to obtain a deed of adherence from the buyer by which he agrees to be bound by the shareholders agreement.
Shareholders agreements usually have provisions which provide for the termination of the agreement once all the parties no longer hold shares in the company. It is advisable to draft a termination agreement in which parties explicitly declare their intention to discharge one another from obligations generating from their participation in the company.
A shareholders agreement may specify the criteria for amendment, such as a majority vote. If one party has more vested in the company, eg. a venture capitalist, then the agreement may give him a bigger say. Otherwise the agreement of all parties to the document is generally required. The High Court also has the power to amend a shareholders agreement.
Some of the provisions usually included in a shareholders agreement include details of management powers to be granted to directors, appointment of directors, what business the company will carry out and where, appointment of other professionals such as banks, restrictive covenants, provision of further finance, binding shareholders to vote in a particular way, confidentiality and restrictions placed on share dealing.
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