When do I need a shareholder’s agreement

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The idea of being a shareholder and being able to call the shots in a company is appealing to almost everyone in the world. There are questions that one should ask themselves before just jumping into making investments such as buying shares. These questions aim to ensure that you know what is expected from you as well as all the steps you can take to ensure that you and your investments are protected and one such way is through a shareholder’s agreement.

What is a shareholder’s agreement?

A shareholder’s agreement is an arrangement that is concluded between the shareholders of a company and outlines the rights and duties of the shareholders and also describes how a company should be operated. As lawyers, we usually say that a shareholders agreement regulates the relationship between the shareholders inter se (i.e., Between themselves), as well as the relationship between the shareholders and the company itself. Section 15(7) of The Companies Act (“the Act”) provides that the shareholders of a company may enter into an agreement with each other with regards to any matter relevant to the company provided such agreement is in line with this Act and with the company’s memorandum of incorporation.

Advantages and disadvantages of a shareholders agreement

The first advantage is that it is a private document and it is not open to public scrutiny which simply put, means it cannot be analyzed by any other person who is not party to the agreement. Secondly, the agreement draws its power and authority from the law of contract and not section 15 of the Act. This means that any claim for damages or breach of the agreement is based on remedies provided by the law of contracts. Thirdly, it allows for the protection of the minority shareholders by restricting the majority shareholders from using their powers to the exclusion of the minority shareholders. Fourthly, it confers power to control specific aspects of the company (for example, who can spend money without receiving board approval, how much can they spend etc.). Fifthly, it creates certainty specifically with regards to all the rights and duties each of the parties have. Finally, it regulates the raising of capital. This is done so as to avoid dilution of shareholdings by controlling how a new shareholder becomes a shareholder.

The main disadvantages are that it only binds those who are party to it and only binds new shareholders if they consent to be bound by the agreement. The amendment of the shareholders agreement needs the consent of all the shareholders who are party to it. It being a contract means there is little flexibility as the people who are party to it are confined to act in accordance with its provisions only. The shareholders agreement needs to be updated every once in a while, (an average life span of a shareholders agreement is usually 3 to 5 years for a typical private company) to make sure it still accommodate the ever changing situation in a company.

What may be included in a shareholders agreement?

The shareholders agreement can contain a vast number of provisions and each agreement will be different depending on the objectives of the shareholders involved. Some of the provisions that may be included are the rights, duties and the obligations of the shareholders. These provisions will layout who is involved in the actual day-to-day business of the company as well as what responsibilities all the shareholders have to the company.

The shareholders agreement may also include provisions on decision making. These provisions set out how decisions will be made. These may include decisions such as how the dividends of the company will be paid out to the shareholders and how the shareholders will appoint directors.

 It may further include provision on the funding of the company. These provisions allow shareholders to decide what contribution to the company each shareholder will make. It can also include agreement on how funding for the future for the company will be acquired. The provision also sets out whether there is a duty placed on the shareholders to provide the company with funding as well as the procedures by which the shareholders can reclaim the funding.

The provisions on the exiting of a shareholder and dispute resolution procedures may also be included. These provisions outline the procedure that must be followed when a shareholder wishes to relinquish his role as shareholder. The agreement may provide for the protection of the remaining shareholders should the exiting shareholder wish to sell to a third party. This provision also sets out how the shares should be valued. Since disputes often arise where different people are working together, this provision puts procedures in place to resolve the disputes as they arise.

So, when do you need a shareholders agreement?

The shareholders agreement is an important piece of the puzzle when planning the operation of a company. It is for this reason that the agreement should be designed to fit the objectives of the company. There is no legislation or rule that specifically requires that a company must have shareholders agreements. Shareholders agreements can be put in place at any time, although it is more advisable to put them in place when the company is started, or the company has more than one shareholder. Since it can be concluded at any time, it can also be entered into when a new shareholder gets shares.

Conclusion

A shareholder’s agreement is not required by law. Be that as it may, it is still a very important document to have as it regulates the relationships that exists between the different shareholders and the relationship the shareholders have with the company. Its benefits outweigh any reservation a person might have about having it in place. The answer to the question as to when you need a shareholders agreement is simply when you become a shareholder.

– Mbuelo Munyai

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