Do you need a Shareholders Agreement?
When individuals enter into a business arrangement, it is common for those persons to enter into a partnership agreement which regulates the conduct of their relationship.
The same cannot be said for shareholders and directors in a proprietary limited company which conducts a business.
It is recommended that shareholders and their directors should enter into a Shareholders Agreement which will regulate their conduct and set out their duties and responsibilities, much like a partnership agreement.
Such agreements usually specify that each shareholder has the ability to hire and fire their own directors.
They also set out arrangements regarding the conduct of meetings of the board of directors and general meetings, voting rights as well as the requirement to prepare annual financial statements and to make such information available to all shareholders.
There will be provisions regarding distribution of profits, how working capital is to be contributed and/or raised and a dispute resolution procedure.
Most importantly there will be provisions indicating how a shareholders shares are to be dealt with in the event that a party wishes to sell their shares or is required to leave the company.
If a shareholder or director is guilty of misconduct or breach of the shareholders duties or is simply not fulfilling their duties, do the other shareholders have a right to exclude that person as a shareholder and to buy their shares?
If yes, how is the outgoing shareholder’s shares to be valued for the purposes of the share transfer to the continuing shareholders?
If a person is retiring because of illness or disability, how is that outgoing shareholder’s shares valued and who has the right to acquire those shares?
Generally it is the remaining shareholders who have the first option to purchase an outgoing shareholders shares.
Another perplexing question is whether a defaulting outgoing shareholder should receive the same value for their shares as a shareholder who is simply retiring and has not committed a breach of the terms of the Shareholder Agreement.
I encourage you to ascertain whether you have a Shareholders Agreement and if you would like any additional information regarding such agreements, please contact me or one of our business lawyers because at Everingham Solomons Helping You is Our Business.
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