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What is a Shareholders Agreement (SHA)?
The Shareholder’s Agreement is meant to protect the interests and assure the correct treatment of a company’s shareholders. In contrast to company by-laws, which are required by the Companies Act, the Shareholder’s Agreement is an optional agreement between part or all of a company’s shareholders.
The Shareholders Agreement is a contractual agreement between the parties that is solely binding on the parties to the Agreement. A well-prepared Shareholders Agreement will assist the parties in maintaining a good relationship.
The following information is included in this Shareholder’s Agreement:
- Details of the Parties entering into this Agreement.
- The total authorised capital of the Company.
- The Shares held by each Shareholder and their percentage of Company ownership.
- The details of the first refusal right by other Shareholders before transferring any Shares.
- “Drag-along rights” and “tag-along rights”
- Provisions related to the Directors’/Board’s rights and obligations.
- Details related to the Company’s management.
- Non-compete clause.
Benefits of Shareholders Agreement (SHA)
The SHA protects shareholders’ rights.
Role and Responsibilities Clarity
It clearly explains the Shareholders’ various duties and obligations.
Resolution of Disputes
Dispute is minimised through planned dispute resolution methods, saving money, time, and energy.
Minority Shareholder Protection
It acts as a shield to safeguard the interests of minority shareholders from potential market hazards.
Role separation between management and shareholders
It defines and governs the company’s management and shareholders’ relationship.
Only the Parties are bound by it.
As a contractual arrangement between the parties, it is exclusively binding on the parties to the Agreement.
Minority shareholders are prohibited from transferring their shares to competitors or other parties.
Major Clauses of Shareholders Agreement (SHA)
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Frequently Asked Questions
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A shareholders agreement is a legally binding document specifying the owners’ rights and responsibilities and the Company’s management structure. It defines how a company will be run, how shareholders’ rights will be protected, and how investors can cash out of their stake.
Shareholder voting rights are defined in the shareholders’ agreement. A shareholder’s level of involvement in the Company’s operations is determined by the number of directors they vote for. The shareholder agreement also details the board’s operations, such as the frequency, location, and membership requirements for board meetings.
The shareholder agreement should outline which matters are reserved for the board and which require shareholder approval. It will also detail the necessary majority vote to pass a given proposal. In most cases, the board of directors should be in charge of day-to-day operations, while shareholders should vote on matters of critical importance.
If the Company issues additional shares, the new shareholder must enter into a “Deed of Accession” with the corporation and all existing shareholders to be obligated by the shareholders’ agreement and included as a shareholder in the corporation’s register.
In a Deed of Accession signed by the Company, the new shareholder, and all existing shareholders, the new shareholder agrees to be bound by the terms of the shareholders’ agreement.
If the new shareholder agrees to be bound by the terms of the existing shareholders agreement, then there will be no need to amend the agreement.
Restrictions on the Transfer or Sale of Stock
- Only in accordance with the terms and circumstances of the shareholder’s agreement may a shareholder transfer, sell, or assign their shares to third persons.
- A shareholder may be prohibited from selling or transferring its shares without the consent of the other shareholders.
- Existing shareholders are protected from becoming indirect Company owners by an unknown party.
- Shareholder agreements frequently include “pre-emptive” rights clauses.
- These provisions can prevent outsiders from purchasing shares before the current shareholders can do so.
- The stockholders can then ensure the same management team is in place.
The Right to Tag Along and Be Draped
Both ‘drag along’ and ‘tag along’ provisions (described below) are common in shareholder agreements. The shareholders may be able to count on a higher buying price if the selling of their shares is restricted.
Under this provision, the majority If a majority shareholder wants to sell their shares to an outsider, they can compel the other owners to sell on the same terms or face legal action.
The Company’s minority stockholders are safeguarded by this provision. As a result, if the majority shareholders choose to sell their shares, the minority shareholders can participate in the transaction and sell their shares as well.
The ability to sell or transfer shares and the termination of the connection between shareholders are often addressed in shareholder agreements. There may be times when this partnership ends due to something called an “Exit Event.”
Common exit events include the sale of a sizable portion of the Company’s stock or assets, a merger with or acquisition by another business, the Company ceasing operations and selling off its assets, and the Company’s shares being listed on a stock exchange through an initial public offering (IPO).
Shareholder agreements typically address potential exit events, their effects on shareholders, and the method for determining the value of shares in the case of a sale or initial public offering.