What you need to know: do we need a shareholders’ agreement?

Rules and regulations govern the operation of companies but shareholders often want to vary these standard rules for their own company. Companies regulations tend to favour the majority shareholder because they have the greatest share of voting rights, including the ability to appoint or remove directors, and minority shareholders have very limited powers to block those decisions.  

 Why?

  • Clear conversations: it’s better to discuss the hard issues now than being unprepared in an emergency or when a shareholder is exiting the company. 

  • Joint ventures: if the shares are held equally by shareholders, a shareholders’ agreement can vary the usual companies regulations so that no shareholder can make any decision without the consent of the other shareholders.

  • Minority shareholders: if the shares are not held equally by all shareholders, a shareholders’ agreement can set out protections for minority shareholders (e.g. decision making powers and tag along rights). 

  • Quasi-partnerships: the shareholding structure of the company may not reflect the intention of the shareholders that the company is to be run as a partnership – everyone has an equal say in how the company is run, the same access to the company’s information and the company’s success is shared equally. The shareholders’ agreement can vary the companies regulations accordingly.

  • Share transfers: a shareholders’ agreement can place restrictions on shareholders transferring their shares. Small businesses find it particularly useful for the initial shareholders (i.e. founders) to retain their shares in the company rather than allowing unknown third parties to come in.

  • Share incentive plan: if key employees and other advisors are given shares in the company as part of their incentive package, you’ll need a shareholders’ agreement to link that shareholding to the employment or engagement.

 How do we start?

We recommend that shareholders have an objective and honest conversation, covering both the current circumstances and future scenarios for both the company and its shareholders. Here is a list of questions to get you started:

  • What are the roles and responsibilities of each of the shareholders?

  • What happens if one of the shareholders wants to leave the company?

  • What happens if one of the shareholders does not want to leave the company? How will the other shareholders remove them?

  • Who owns what percentage of your company?

  • What will be the financial contribution of each shareholder? Will those contributions be equal?

  • Who will make strategic decisions about the company? Will day-to-day decisions be made differently?