Shareholders agreements are documents that set out the rules, plans and responsibilities of the shareholders and their relationship with their Company..
Companies are well advised to draw them up in order to prevent disagreements and conflict amongst shareholders. As Companies are legal entities in their own right, and continue to exist whether the shareholders are around or not, they need to be protected from events affecting shareholders.
The most important consistent reason that most companies should have shareholder agreements in place is to lay down the rules governing arrangements between shareholders in the event that something untoward happens one shareholder, such as death or incapacity, or simply their circumstances change and they want to exit the business. Therefore in order to prevent the problem of shareholders not having a plan to deal with these issues, and avoid them being left trying to sort out an agreement after they have fallen out in the first place, a proper shareholders agreement is drawn up upon formation of the company.
This could be best summarised by saying that is should list the rights and obligations of the shareholders in relation to the company.
The items that could be covered include:
- Who is an executive director of the company and what hours and responsibilities do the executive directors have?
- How many shareholders need to be in agreement for decisions to be made?
A formula for issues of new shares needs to be drawn up any new issue, which does not go in the same proportion to existing shareholders as their current percentages results in a dilution of control of those existing shareholders. This formula may go so far as to determine the value of the new shares to be issued and also how issues are to be resolved where one or more of the shareholders object to issuing new shares — do you want to be able to compel minority shareholders to go along with share issues for example?
What happens in the event of a dispute between shareholders, for example where on shareholder is not pulling his weight in relation to his stated duties and responsibilities?
What financial information is to be prepared and when and what information is released to shareholders?
The members may want to insist on life assurance policies payable to the company in the event of death of one of the shareholders in order to automatically release funds to the company to help in buying back the shares of the deceased shareholder from their spouse or estate.
What happens if one of the shareholders who is working in the business becomes unable to work?
The members may want to agree how shares are to be valued in the event of certain events and changes occurring.
The members may want to restrict the limit of authorisation of the shareholders who work in the business so that they cannot commit the company to contracts beyond a certain value.
What salaries and dividends are to be paid out to the directors and shareholders?
What events other than insolvency would create a situation that would lead to the company being wound up?
While there are many other issues, including some that are unique to the particular situation, that may need to be considered but the those above are a usefulstarting point for most companies.
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