Morne Patterson – Important Sections to a Shareholders Agreement Which You Should Know

A shareholders agreement is an agreement between the shareholders of a company that outlines the rights, responsibilities, and obligations of each investor. This agreement is essential to ensure that shareholders are protected and that the company is managed in accordance with their mandate. In this blog I will highlight the key clauses that every shareholders agreement should include.

 

Morne Patterson – Important Sections to a Shareholders Agreement Which You Should Know

Company and Shareholders

 

The agreement should begin by outlining the company and the shareholders involved. This section should include the name of the company, the date the company was formed, the purpose of the company, and the name of each shareholder.

 

Capital Contributions

 

This section sets out the terms and conditions for each shareholder to contribute capital to the company. Contribution does not necessarily need to be in the form of cash and regularly includes intellectual property such as software.

 

Voting Rights

 

The shareholders agreement outlines the voting rights of the shareholders. This section should detail the percentage of the company's shares each shareholder holds, how the shareholders can vote, different classes of shares, and any restrictions on the voting rights of certain shareholders.

 

Dividend Rights

 

The shareholders agreement also covers the dividend rights of the shareholders. This section should include information about how much each shareholder is entitled to receive in terms of dividends, when dividends should be paid out, and how dividends will be determined.

 

Board of Directors

 

This clause sets out the powers and duties of the board of directors, including the appointment and removal of directors, the frequency of board meetings, and the quorum required for decisions to be made. This section will often make reference to “Reserved Matters”, which are predefined, critical decisions required to be approved by key shareholders.

 

Transfer of Shares

 

The shareholders agreement should also include provisions regarding the transfer of shares. This section should outline the process for transferring shares to a new shareholder, any restrictions on the transfer of shares, whether existing shareholders have pre-emptive rights to purchase shares from an outgoing shareholder, and the duties of the parties involved in the transfer.

 

Come Along and Tag Along

 

A “Come Along” clause is a provision in the shareholders agreement which allows the majority shareholder to require the minority shareholders to join a sale of the company to new investors. This clause is designed to allow for a 100% company sale by forcing all shareholders to transfer their shares.

 

A “Tag Along” clause presents the minority shareholder with the right to join in the sale of their shares when a majority shareholder decides to dispose of their shares, often at a higher price. This clause protects minority shareholders and is designed to ensure that all shareholders have the same access to potential buyers.

 

Restraints and Non-solicitation

 

These clauses are designed to protect the company’s confidential information, its customer base, its staff and intellectual property. The idea is to prevent a shareholder or former shareholder who might attempt to compete with, or solicit customers/staff of the company. Restraint of trade clauses restrict a shareholder’s ability to use the confidential information and expressly prohibits the shareholders from competing with the business for a certain period of time. These clauses often continue to apply after shareholders have sold their shares.

 

Dispute Resolution

 

Finally, the shareholders agreement should also include provisions regarding how disputes between shareholders will be resolved. This section should outline how disputes will be handled, who will be responsible for resolving the dispute, and any other relevant information that relates to dispute resolution. It may also include a buy-sell provision, which allows for one shareholder to purchase the shares of another shareholder in the event of a deadlock.

 

Conclusion

 

A shareholders agreement is an essential document for any company, as it outlines the rights, responsibilities, and obligations of each shareholder. It is important to ensure that all the key clauses outlined above are included in the agreement to ensure that the shareholders are protected and that the company is properly managed.

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