A shareholders’ agreement is a contract between the shareholders of a company in which they agree how the company will be run. The agreement sets out how they will use their voting power in the company to ensure that the terms of the agreement are complied with for as long as they are all shareholders.
Shareholders’ agreements vary widely, but the typical agreement is designed to protect all the parties against a majority using their voting power to the detriment of others.
Being a shareholder does not confer the right to be a director. Most shareholders’ agreements will deal with this and go further by providing a list of management decisions that require the agreement of all (or a specified percentage of) the directors. For example, provisions which relate to matters that are outside the usual course of the business, such as changing the nature of the business, entering into unusual contracts or contracts in which a director is personally interested, borrowing above agreed limits, employing or dismissing staff in unusual circumstances or bringing or defending legal proceedings.
Shareholders’ agreements are also important when something untoward happens to one of the shareholders which can have an effect on the company – i.e. there is a death, bankruptcy or long term illness. What if a key shareholder ceases to work in the business? What stops a shareholder selling shares to someone outside the company? Most of our businesses want to be able to at least have the chance to buy out that shareholder and have a mechanism in place for determining the price and any payment terms.
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