Importance of having a Shareholders Agreement
Q: Why Shareholders’ Agreement?
A shareholders’ agreement (“SA”) is an agreement between the shareholders of a company which generally sets out the shareholders’ rights, privileges and obligations along with the foundation of how the corporation will be set up, managed and run. Having a SA agreement is a cost effective way of minimizing any issues which may arise later on by making it clear how certain matters will be dealt with and by providing a forum for dispute resolution should an issue arise down the road. Taking the time to sit down and discuss certain issues from the beginning can help eliminate potential disagreements between shareholders and ensure that everyone is on the same page.
As a general rule, corporate law gives the upper hand to the majority shareholder(s) as decisions can typically be made with the positive vote of a simple majority (51%). In drafting a SA, the shareholders can decide what percentage is required for certain decisions. For instance, fundamental decisions pertaining directly to the business, financing or business structure may require a unanimous decision by all of the shareholders, while other less important decisions may simply require a majority vote. This is especially important where one shareholder holds a majority of the shares in the corporation as without a SA, most shareholders’ decisions could be made by the sole majority shareholder leaving the Bodybuilding Glossary: A – M aaron carter wife boost your testosterone with tribulus terrestris to maximize muscle growth minority shareholder(s) with little or no voice.
Q: How to regulate Financing for the Business?
Whether at the start-up phase or during operations, a business will require access to capital. A SA can set out how the corporation will access funds and whether the shareholders are responsible for contributing such funds in accordance with their relative interest in the business. In addition, where not all shareholders are willing or able to contribute funds when needed, a SA can set out preferential interest rates for those shareholders who do contribute, or restrict the Board Nine Defendants Arrested For Operating An International Steroid Distribution Ring best alpha pharma blink health rx – best discount pharmacy prices – apps on google play of directors from declaring any dividends until the shareholder’s loan has been repaid unless the consent of the shareholder has been obtained.
In the event that the corporation will be accessing debt financing from a bank or third-party lender, a SA can deal with whether shareholders are obligated to give personal guarantees and what will happen in the event that a shareholder, for whatever reason, does not or cannot give a personal guarantee.
Q: How to protect the interests of the Minority Shareholders?
A minority shareholder (who owns less than 50% of shares in a company) should endeavour to negotiate for the following terms in the SA:
- Quorum
A minority shareholder with a large minority stake or a strong bargaining power may negotiate for a right to appoint a director. The minority shareholder may further require his representative to be present at the board of directors’ meeting in order to form a quorum. This ensures that the minority shareholder’s appointed directorgets to be involved in every decision making of the board. - Reserved Matters
A minority shareholder only have a minority representation or no representation on the Board of Directors. Therefore, it is pertinent for the minority shareholder to ensure that certain key matters of the company are reserved for the unanimous approval of the shareholders. This gives the minority shareholder a right to veto over certain significant matters in the company. - Tag-along right
A tag-along clause grants the minority shareholder a right to exit from the company. This occurs when a majority shareholder decided to sell his/her shares to a third party. The provision allows the minority shareholder to “tag-along” with the majority shareholder’s right to exit. This is done by compelling the majority shareholder to procure that the third-party purchaser must also make an offer to purchase the minority shareholders’ shares on the same terms that are being offered to the majority shareholder. - Pre-emption rights
The majority shareholder will have the right to allot new shares without the approval of the minority shareholders. A minority shareholder would therefore, want to ensure that it has the right to purchase any new shares allotted by the company before the new shares can be allotted to third parties. This provision seeks to avoid further dilution of the minority shareholder’s shareholding in the company.
Q: How to safeguard the interests of the Majority Shareholders?
A majority shareholder (who owns more than 50% of shares in a company) should endeavour to negotiate for the following terms in the SA:
- Board representation and control
A majority shareholder has the right to control the board. This can be achieved by having the right to appoint the majority of the directors to the board and having a majority representation on the board. The majority shareholder should also negotiate for the chairman of the board to be either one of his directors and to ensure that the SA clearly provides that his appointed chairman has a second or casting vote. In the event of a deadlock, the chairman of the board will, therefore, have the right to vote and decide on the matter. - Reserved Matters
Minority shareholders will seek to ensure that significant matters of the company are reserved for their approval. However, this can be destructive to the business of the company, especially when matters reserved for the approval of the minority shareholders failed to be approved after several attempts. A majority shareholder would, therefore, want to ensure that the scope and the number of reserved matters are restricted under the SA. - Drag-along right
A drag-along provision is an important exit clause in the SA to protect the interest of the majority shareholder. This provision enables the majority shareholder to compel the minority shareholder to sell their shares to a third-party purchaser who offers to purchase all the shares of the company. - Right of first refusal
Right of first refusal provision restricts shareholders of a company from transferring their shares to outsiders. Any shareholder who seek to transfer his shares must first offer his shares to the existing shareholders of the company. This provision provides the majority shareholder with an opportunity to purchase the shares of the departing shareholder and restricts any outsiders who may be complete strangers from purchasing the shares of the company.
Q: How to resolve a Deadlock situation?
Deadlock refers to a situation where there is a fundamental disagreement between the shareholders of a company. A deadlock situation is most common where there are two shareholders with equal shareholdings (i.e. 50:50 shareholding) in the company and one of the shareholders refuse to vote or attend a meeting.
Deadlock provisions in the SA set out the process, manner and time period within which the deadlock is to be resolved. In the absence of a deadlock provision in the SA or the lack of an SA, the disputed issues may end up unresolved, causing disruption to business or in a worst case, resulting in the company’s total failure to function.
Q: How to know the value of the shares?
A well-drafted SA should consist of provisions on how the shares of the company are valued. These provisions help to avoid potential disputes during the valuation process when one shareholder seeks to trigger a buy-sell provision under the SA. In the absence of such provisions, different parties may have different views as to how the shares are to be valued.
For instance, one party may argue that the shares should be valued based on the fair market value. On the other hand, a party may argue that the shares should be valued based on the book valuations.
Q: How to cater for exit strategy?
A well-written SA will provide for different exit strategies in the event that the shareholders can no longer be in business together. At the incorporation stage, shareholders should consider what will happen in the event that they no longer get along, a shareholder is forced to move away or someone simply wants out from the business. The best time to talk about this is in the initial stages when everyone is getting along and excited about the new business venture they are embarking on. Agreeing to certain terms from the get-go can eliminate drawn-out and expensive negotiations later on and hurt feelings.
A shot-gun clause allows a shareholder to trigger a forced buy-sell scenario, meaning the “triggering shareholder” makes an offer to the remaining shareholders to buy their shares at a specific price. The remaining shareholders can then either accept the offer to sell their shares at that price or are alternatively forced to buy the triggering shareholder’s shares at the same price.
Other clauses including a drag-along and piggy-back clause can also be included which in the former, forces minority shareholders to sell their shares in the event that a majority shareholder wants to sell all of their shares to a third party, or in the latter, gives the option to minority shareholders to sell their shares along with the majority shareholder.
Reality is that business partners will have arguments and not always see eye-to-eye on all issues. Corporations that have more than one shareholder should consider having a shareholders’ agreement in place in order to set out the expectations of each of the shareholders from the beginning. Having these discussions from the get-go and spending a little bit of money to have a SA drawn up can save much time, money and effort down the road.
NOTE: This article is presented for informational purposes only. Please consult your legal counsel or solicitor to obtain proper legal advice to ensure your rights and interests are protected.
Prepared by Lai, Goh & Associates