Shareholders Agreement

Shareholders Agreement Tips and Key Criteria

A Shareholders Agreement (“SHA”) is akin to a pre-nuptial agreement.

The focus is usually on what each shareholder will bring to the relationship and the way the new entity will be managed and report its results.

Other core issues relate to the issue of new shares and right and obligations that must be complied with in any sale of shares. A vlauation clause is often included. For obvious reasons, knowing how to set the exit price if a shareholders chooses to exit is a very important commercial issue for all concerned.

It’s wise to also pay close attention to the ‘divorce’ provisions.

Specify what will happen if things turn sour and how a crisis will be managed or how the relationship will be fairly severed if that becomes necessary.

Set out below is a very top-level overview of provisions commonly included in a such an agreement.

Of course, when well drafted a SHA will include other issues and all provisions should be fleshed out in detail sufficient to address a wide range of circumstances.

• The SHA takes precedence if there is any conflict with the Constitution.
• Is entry into the SHA conditional on any other event occurring?

Shares

• The classes of shares and their rights attached to each class
• Detailed obligations of the respective shareholders and the varied shareholder classes.
• Restrictions on the sale of share to any third party unless they sign a document (often termed a “Deed of Accession”) agreeing to be bound by the terms of the SHA.
• The Board’s right to refuse to register a transfer of shares unless the other shareholders have waived their pre-emptive rights and a Deed of Accession has been signed.
• The pre-emptive right can vary in many ways but usually written notice must be provided to the other shareholders that a sale of shares is intended. If they do not accept the offer to buy the shares within a set timeframe, the shares can be sold to a third party. If pre-emptive rights are exercised the shares may be sold pro-rata – divided according to each buyer’s current proportionate shareholding – to the other shareholders or they can be sold in a single block if only one shareholder wishes to purchase.
• Often an independent valuer is appointed to determine a valid sale price
• The process for selling shares to third parties is detailed with timeframes for certain actions stipulated.
• Directors appointed by selling shareholder are required to resign when the sale is completed.
• It is common for a shareholder to be required to sell its shares if the majority of the ownership of that entity changes as this prevents other shareholders from being bound to a changed relationship.
• The actions that will result if a shareholder dies or becomes bankrupt (or liquidated) are set out and the defaulting party is usually required to sell its shares to the other shareholders at a price determined by an independent valuer.

Board

• The number of directors (including independent directors is set down.
• Shareholders are prevented from directly or indirectly competing with the company.
• The size, timing and conditions attached to shareholder loans or advances are set down.
• Whether shareholders will be guarantors if the company borrows funds.
• The shareholders are obliged to keep confidential the company’s information.

Dispute Resolution

• How a matter will be escalated to the respective CEOs to resolve disputes.
• Unresolved matters are then to be referred to mediation and, if still unresolved after a specified period, either to arbitration or to an independent expert.