By law – No, but it is advisable if there is more than one shareholder in your company.
When things go well – everything appears seamless, and nobody looks at the formalities. It’s for the times that relationships go bad – a shareholders agreement containing previously agreed terms could be your saving grace.
What should be covered in a shareholders agreement?
Below are some areas that your shareholders agreement should cover:
Shareholder’s vs Director’s decisions: which decisions require shareholders approval, and what percentage of shareholders voting in favour/against is required to approve/reject a decision?
Deadlock: Sometimes there is a situation where some decisions cannot be agreed upon, or the votes in favour and against are equal. In this situation, you could consider who will get a casting vote, or other methods or resolving such deadlock (e.g. mediation).
Share transfer procedures:
The process of issuing new shares, cancelling shares, share splitting etc.
First and/or last rights of refusal: Setting out the procedure in which a shareholder looking to sell its shares must carry out. First right of refusal is where a shareholder must first give notice to the other existing shareholders of its intention of selling its shares before offering it to a third party. Last right of refusal is where the selling shareholder must again offer to existing shareholders after negotiations with third parties before it is sold.
Drag Along rights: Where majority shareholders can require the minority shareholders to sell its shares if certain ‘trigger’ events occur.
Tag Along rights: Where a majority shareholder wishes to sell its share to a third party, a minority shareholder may wish to tag along with the sale at the same sale price.
Share Price: Method of valuing shares, whether an expert is appointed to determine market value, does the company accountant determine the value, or otherwise.
Process of Accession: Provisions containing a process on how new shareholders are bound. Usually a ‘deed of accession’ is entered into at the time the new shareholder takes on the shares, which will contain the new shareholder’s agreement to be bound by the terms of the shareholders agreement.
Dividends: Adopting a dividend distribution policy on amounts and/or percentages that are distributed to shareholders from profits of the company.
Disputes: How are disputes dealt with? Will there a mandatory process (such as mediation or arbitration) that must first occur in an attempt to settle the dispute before any court action can be taken?
Buy-Sell Provisions: These are provisions that set out rights and obligations of shareholders in the event certain trigger events occur (such as bankruptcy, insolvency, permanent disability, death, retirement, divorce). An option to purchase shares from a shareholder that has suffered a trigger event is usually afforded to the other shareholders. A reason for this is so that it prevents a situation a shareholder’s creditors/family member/next of kin/ beneficiary inherits the shares and leaves the other shareholders in a situation where there are shares in the company owned by third parties who do not have any experience in the company’s operations. Sometimes buy-sell provisions are set out in a separate document (a buy-sell deed).
Conflicts of Interest, Restraints and Non–competes: Consider obligations on shareholders where they must disclose any conflict of interest, also obligations of restrictions imposed while they are a shareholder of the company and even for a period proceeding (such as not owning an interest or competing with the company’s business for a period of time). Other restrictions could include restraints from dealing with the company’s suppliers and/or customers.
IP Ownership: Clear distinction and indication on who owns intellectual property that the company may own, that shareholders may bring to the company etc.
There are a number of considerations that need to be thought through when going into business with others. A Shareholders Agreement will largely form the basis of the relationship between shareholders, so it is important to ensure there is a written agreement in place as a check and balance. If you require assistance in preparing a Shareholders Agreement, please do not hesitate to reach out!