The power of clarity: how a shareholders’ agreement protects your business

A shareholders’ agreement is a private contract between the shareholders of a company that outlines their rights, responsibilities and obligations. It complements a company’s constitutional documents and generally helps to manage the relationship between shareholders.

While not a legal requirement, having a shareholders’ agreement in place is vital for protecting the interests of both majority and minority shareholders, and ensuring smooth operation of the business.

One of the key reasons shareholders’ agreements are important is that they provide clarity and certainty. They set out how important decisions will be made, for example:

• how the company will be managed;
• how shares can be transferred;
• how disputes will be resolved; and
• what happens if a shareholder wants to exit, becomes bankrupt or dies.

Without such an agreement, these issues are governed, by default, by company law, which may not reflect the specific needs or intentions of the parties involved.

Shareholders’ agreements are also essential for protecting minority shareholders. In the absence of tailored protections, majority shareholders could make decisions that are not in the best interests of the minority. A well-drafted agreement can include provisions such as:

• veto rights (e.g. unanimous decision may be required when issuing new shares in the company, as this could dilute the minority shareholder’s current shareholding);
• tag-along rights (e.g. if majority shareholders sell their shares, minority shareholders can “tag along” and sell their shares on the same terms);
• pre-emption rights to ensure fair treatment (e.g. this will prevent majority shareholders from selling their shares freely without offering them first to existing shareholders);
• certain percentage of profits must be distributed as dividends; and
• minority shareholders can be granted rights to receive financial reports, inspect records, or attend meetings.

Additionally, these agreements help prevent and resolve disputes. By setting out clear procedures and expectations from the outset, shareholders can reduce the risk of costly legal battles in the future.

In summary, a shareholders’ agreement is a critical tool for corporate governance. It complements the company’s articles of association and helps build trust between shareholders, by providing a clear framework for how the company will be run and how potential conflicts will be managed.

If you have any questions or would like more information, please contact our corporate team.