When it comes to a company, the corporate “constitution” is often assumed to be the most important document when it comes to governing its day-to-day affairs and operations. In reality, there are a range of issues which are not covered by a constitution and implementing a Shareholders Agreement can be key; giving certainty and clarifying shareholder “rights”, expectations and procedures. These become particularly useful in the event of a dispute or relationship breakdown. Shareholders Agreements cannot remove a shareholder’s statutory rights.
Consider the following issues which can be covered in your Shareholders Agreement:
- Management Structure: the process for appointing directors, board composition and the general management and running of the company;
- Decision making: allocating different types of decisions to different classes of people to approve them. Relatively minor day-to-day company decisions may require only a majority vote of directors, but bigger decisions affecting the core business of the company (such as a merger or winding up) could require approval by a special resolution (75%) or unanimous decision of directors and shareholders;
- Share transfers: provisions relating to the transfer of shares form a crucial part of the overall Agreement. These clauses cover a multitude of situations, including first rights of refusal, price valuation mechanisms and the right (or obligation) to buy or sell in certain circumstances. These can work to resolve voting deadlocks between shareholders;
- Restraints: imposing obligations on existing shareholders and directors to refrain them from starting up a competing business next door, or poaching employees or clients from the company for their own benefit, ensuring they dedicate their time and efforts to ensuring that the business is a success; and
- Dispute resolution: despite best efforts, disputes with business partners are all too common, so it is important to have a pre-agreed dispute resolution process in place at the start of the venture, so that disagreements don’t disrupt the entire operation.
The risk in not having a Shareholders Agreement is that a dispute or stalemate between the decision makers could jeopardise the operation of the business or payment of creditors, leading to a deterioration of the business’ good will and value. Absent a predetermined resolution process, the only way to resolve a dispute may be litigation, which in turn can lead to the winding up the company by the Courts.
Ideally, your Shareholders Agreement can be drafted and filed away, never needed because the business and the parties are working well together. If, however, you ever get caught up in a dispute, you’ll be glad you’ve got a safety mechanism in place.