1 May 2014

Shareholders’ agreement: Do you need one?

What is a shareholders’ agreement?

A shareholders’ agreement is a contract between the shareholders of a company outlining the rules, processes and framework for dealing with contentious matters that may arise, right through to outlining responsibilities for the day to day running of the company.

A shareholders’ agreement can include as few or as many matters as the shareholders wish, including but not limited to:

• The structure of the company;
• How the company is governed;
• Board meetings – when they happen and who must attend;
• Shareholders’ voting rights – whether they are all equal or not;
• How will the company raise capital;
• Distribution policy; and
• When shares can be issued or transferred.

It is important to note that a shareholders’ agreement is not only between the shareholders of the company but also incorporates the company itself as a party, therefore binding the company to act in accordance with its provisions.

Shareholders’ agreement v company constitution

The Companies Act 1993 (the Act) removes the obligation for a company to have their own constitution.  As an alternative, companies that do not have their own constitution are governed by the Act which sets out their rights, powers, duties and obligations, which is why the Act is commonly referred to as a company’s “default constitution”.

A company’s constitution and its shareholders’ agreement may contain similar provisions given both set out the rules and procedures for running the company.  However, there are important distinctions that differentiate the documents, which show that adopting a shareholder’s agreement is important:

• A shareholders’ agreement is a private document that is not registered at the Companies Office (unlike a company’s constitution).  This is considered the most advantageous reason for having a shareholders’ agreement, as all of the provisions remain confidential.
• Rights, powers and obligations relating to a company’s control are primarily outlined in a shareholders’ agreement, which  stipulates who governs the company and who is responsible for making specific decisions, e.g. changes to voting rights, decisions to wind up the company or decisions regarding the issuing/transferring of shares.  A constitution can contain similar provisions, however, these are usually less detailed and general in nature given that it is publicly available.
• The process involved for shareholders exiting a company is described in a shareholders’ agreement, which can be as detailed or as simplistic as required. The Act does not provide guidance for matters such as this, which may cause issues between exiting and remaining shareholders.
• A shareholders’ agreement can be entered into prior to a company being incorporated which can be extremely important where there are time constraints surrounding a transaction, (e.g. where the shareholders want to agree on the governing provisions prior to purchasing a business), whereas a constitution can only be adopted after a company has been incorporated.
• By default a company’s constitution can be changed by a special resolution (being 75% of the shareholders that are entitled to vote), whereas a shareholders’ agreement is more difficult to alter given the shareholders must unanimously agree to do so.

Should you have a shareholders’ agreement?

It is important to note that a shareholders’ agreement can contain a unique and tailored private set of rules that bind the shareholders and company to act in a way that is agreed to by all.

It is assumed that smaller, more intimate, companies do not require the additional expense of organising a shareholders’ agreement, however, in practice it is these types of companies that can benefit the most from a shareholders’ agreement where the relationships between shareholders need to be preserved.   Where a company has two or three shareholders that are actively involved in the management of the company, relationships can break down if there are no specific rules and processes to follow when contentious matters arise.  Additionally, where a company has a complex structure with multiple levels and types of shareholdings, a shareholders’ agreement is imperative.

If you would like further information please contact Laura Monahan on 07 958 7479.