Shareholders Contract

In the tabs below we provide a user friendly explanation for the important provisions in a Shareholders Contract .

The Company's Memorandum of Incorporation is vitally important in relation to many of the topics discussed below. As a result, the Memorandum of Incorporation and the Shareholders Contract should be prepared at the same time.

The ContractZone Shareholders Contract is not only comprehensive, but it also includes a detailed Memorandum of Incorporation that is entirely consistent with the Shareholders Contract.

Page 1 of your Shareholders AgreementPage 2 of a Shareholders Agreement

Directors

Although the Companies Act, 2008 provides for directors to be appointed by a majority of Shareholders, it is common practice for Shareholders Contracts to specify how such appointment will take place. The most common variations are: (1) permitting a Shareholder to appoint 1 director for each stated % of the shares held by that Shareholder; (2) permitting a Shareholder to appoint 1 director if it has more than X% of the Shares; and (3) appointing based solely on majority vote. The Shareholder Contract (and MOI) must specify these parameters.

While the Companies Act 2008 does regulate the standards applicable to Directors conduct, it is important to flesh many of these out in the Shareholder Contract . Included in these are the disclosure of related party agreements, the requirements for being entitled to conclude contracts in the name of the Company with entities that are related to a Director and the circumstances under which the Company can bind itself as a Surety to a related party. Another important aspect is the circumstances under which a Director is obliged to offer a corporate opportunity to the Company before taking it up itself.

Voting at Board Level is very important. While you may conduct your business entirely on a collaborative basis and seldom have reason to take a formal vote, it is important to know exactly how directors votes will work. You can grant each director a single vote, or you can provide that a shareholder will vote in accordance with the percentage shareholding held by the Shareholder that nominated the Director.

Shares & Shareholders

What happens to your shares if you die? Now you might say that they pass to your spouse and/or children, but if the shoe is on the other foot, would you want to be in business with your co-shareholder's spouse and/or children? This question is even more important in businesses where the shareholders are actively involved on a day-to-day basis. We believe that it is vital that the Shareholder Contract (and the MOI) clearly determine what will happen with the shares of a deceased, disabled, retiring or insolvent Shareholder. Is there an obligation to buy the shares or is it just an option? Also, how will be purchase price be determined and by who? More than almost any other clauses in a Shareholder Contract , these provisions highlight the importance of concluding a Shareholders Agreement. This tab must be read in conjunction with the "Pre-Emptive Rights Generally" tab.

Pre-Emptive rights are very important provisions in any agreement between shareholders. They regulate the circumstances under which a shareholder may sell his or her shares. Importantly, these provisions normally make it clear that a shareholder must offer to sell its shares to the remaining shareholders on a pro rata basis before it can offer the shares to a third party. More complicated Pre-Emptive rights provisions include options in favour of specified persons and either the price of the sale or the mechanism by which the sale will occur. Other important Pre-Emptive Rights provisions relate to when a majority can compel the minority to sell to a third party - for example - if an offer is made for 70% the remainder must sell, and when the minorities can compel the majority to ensure that they get the same deal - for example - if an offer is made for only 70% of the shares, the majority can only accept if they procure the same deal for the remaining shareholders. Forced sales & options are dealt with in this article under the tab "Death, Disability, Retirement & other Triggers".

Shareholder Resolutions are typically set at +50% for an ordinary resolution and +75% for a special resolution. So depending on your shareholder structure, you may choose to have a long list of Special Resolution items, or none at all (save for those prescribed by the Companies Act, 2008). Various other parameters are important, for example: who may call a Shareholder Meeting, how many days notice is required, where are meetings held and can they be held electronically, etc.

The regulation of capital in the business and the provision of Shareholder funding is important. Similarly, the interest provisions and the circumstances under which loans will be repaid are important.

Dispute Resolution & General Provisions

As stated above, it is vital that the Shareholder Contract and the MOI are prepared together. Many Shareholders Agreements, particularly those that predate the current Companies Act, are inconsistent with the MOI which can have serious negative consequences.

Shareholder disputes are often like divorces. They can be very expensive and take a long time to get resolved. If they are not dealt with in an arbitration, the documentation as well as the evidence is part of the public domain. An arbitration is private. Moreover, the arbitration is generally a speedier remedy than the Court driven process.

The commonly held view that restraint of trade agreements are automatically invalid is incorrect. Whether you choose to conclude a restraint of trade as part of the Shareholder Contract, or separately, we believe that at the very least, substantial shareholders should be bound to reasonable restraints of trade.

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FAQ's in relation to a Shareholders Contract

1What happens to your shares if you die?
Now you might say that they pass to your spouse and/or children, but if the shoe is on the other foot, would you want to be in business with your co-shareholder's spouse and/or children? This question is even more important in businesses where the shareholders are actively involved on a day-to-day basis. We believe that it is vital that the Shareholders Contract (and the MOI) clearly determine what will happen with the shares of a deceased, disabled, retiring or insolvent Shareholder. Is there an obligation to buy the shares or is it just an option? Also, how will be purchase price be determined and by who? More than almost any other clauses in a Shareholders Contract , these provisions highlight the importance of concluding a Shareholders Contract .
2What are pre-emptive rights?
Pre-Emptive rights are very important provisions in any agreement between shareholders. They regulate the circumstances under which a shareholder may sell his or her shares. Importantly, these provisions normally make it clear that a shareholder must offer to sell its shares to the remaining shareholders on a pro rata basis before it can offer the shares to a third party. More complicated Pre-Emptive rights provisions include options in favour of specified persons and either the price of the sale or the mechanism by which the sale will occur. Other important Pre-Emptive Rights provisions relate to when a majority can compel the minority to sell to a third party - for example - if an offer is made for 70% the remainder must sell, and when the minorities can compel the majority to ensure that they get the same deal - for example - if an offer is made for only 70% of the shares, the majority can only accept if they procure the same deal for the remaining shareholders.
3How are shareholder resolutions taken?
Shareholder Resolutions are typically set at +50% for an ordinary resolution and +75% for a special resolution. So depending on your shareholder structure, you may choose to have a long list of Special Resolution items, or none at all (save for those prescribed by the Companies Act, 2008). Various other parameters are important, for example: who may call a Shareholder Meeting, how many days notice is required, where are meetings held and can they be h
4How are directors appointed?
Although the Companies Act, 2008 provides for directors to be appointed by a majority of Shareholders, it is common practice or Shareholders Agreements to specify how such appointment will take place. The most common variations are: (1) permitting a Shareholder to appoint 1 director for each stated % of the shares held by that Shareholder; (2) permitting a Shareholder to appoint 1 director if it has more than X% of the Shares; and (3) appointing based solely on majority vote. The Shareholders Contract(and MOI) must specify these parameters.
5What are directors standards of conduct?
While the Companies Act 2008 does regulate the standards applicable to Directors conduct, it is important to flesh many of these out in the Shareholders Contract. Included in these are the disclosure of related party agreements, the requirements for being entitled to conclude contracts in the name of the Company with entities that are related to a Director and the circumstances under which the Company can bind itself as a Surety to a related party. Another important aspect is the circumstances under which a Director is obliged to offer a corporate opportunity to the Company before taking it up itself.
6How does a board of directors vote?
Voting at Board Level is very important. While you may conduct your business entirely on a collaborative basis and seldom have reason to take a formal vote, it is important to know exactly how directors votes will work. You can grant each director a single vote, or you can provide that a shareholder will vote in accordance with the percentage shareholding held by the Shareholder that nominated the Director.
7How does a Memorandum of Incorporation tie in to a Shareholders Agreement?
It is vital that the Shareholders Contract and the MOI are prepared together. Many Shareholders Contracts, particularly those that predate the current Companies Act, are inconsistent with the MOI which can have serious negative consequences.
8How are shareholder disputes resolved?
Shareholder disputes are often like divorces. They can be very expensive and take a long time to get resolved. If they are not dealt with in an arbitration, the documentation as well as the evidence is part of the public domain. An arbitration is private. Moreover, the arbitration is generally a speedier remedy than the Court driven process.
9Should I have a restraint of trade in my shareholders agreement?
The commonly held view that restraint of trade agreements are automatically invalid is incorrect. Whether you choose to conclude a restraint of trade as part of the Shareholders Contract, or separately, we believe that at the very least, substantial shareholders should be bound to reasonable restraints of trade.