Morne Patterson – What is a Shareholders Agreement and Why its Important

A shareholders agreement is a legal document that outlines the rights, responsibilities, and obligations of the shareholders of a company. It sets out the terms and conditions under which the shareholders will operate and govern the company, and is usually entered into by the shareholders at the time of incorporation or shortly thereafter. A shareholders agreement is only required when a company has 2 or more shareholders.

One of the main purposes of a shareholders agreement is to protect the interests of the shareholders. It lays out how the company will be managed, who will be responsible for making decisions, and how disputes will be resolved. It also establishes the rights of the shareholders to participate in the management of the company, including the right to vote on important matters such as the appointment of directors and the approval of financial statements.

Another important aspect of a shareholders agreement is the provision of exit rights. It sets out the rights of the shareholders to sell their shares, and the conditions under which they can do so. This is particularly important for startup companies, where the shareholders may have invested a significant amount of money and time in the company, and want to ensure that they can recoup their investment if the company is not successful.

A shareholders agreement also usually includes provisions for the protection of the company's confidential information. This is particularly important for companies that have developed proprietary technology or confidential business strategies that need to be protected from competitors. The shareholders agreement may also include restrictions on the shareholders from competing with the company or disclosing confidential information to others.

As noted above, a shareholders agreement is also an important tool for managing potential conflicts among shareholders. It sets out the procedures for resolving disputes and outlines the responsibilities of the shareholders in the event of a disagreement. This can help to prevent conflicts from escalating and damaging the company.

In addition, a shareholders agreement can also provide for the protection of minority shareholders. For example, it may include provisions that require a special resolution vote for certain actions, such as the sale of the company or the issuance of new shares, which can help to ensure that the interests of the minority shareholders are protected. Special resolution generally require more than 75% of all votes in be favour of that decision.

In conclusion, a shareholders agreement is an essential document for any company, as it sets out the rights, responsibilities, and obligations of the shareholders, and helps to protect the interests of the shareholders and the company. It is important to get it right, as a poorly drafted shareholders agreement can lead to disputes and legal problems down the line. Many startups don’t focus sufficiently on getting this agreement right from the outset, often resulting in severe consequence many years down the line. For this reason its highly recommended to consult with legal and financial professional to ensure that the agreement is well-drafted and tailored to the specific needs of you and your company.