Having a shareholders’ agreement in place will provide direction in times of uncertainty and may avoid expensive legal disputes. The agreement is important because there are practical aspects of the shareholder relationship that you may not consider when starting a company or joining an existing one.
For example:
What will happen to a shareholder’s shares on his death?
Without a properly drafted shareholders’ agreement, the shares of the deceased shareholder will be dealt with just like any other asset in his estate and will be inherited by his heir. This could be a spouse, a child, or any other person, depending on the deceased’s will.
The remaining shareholders could end up with a new shareholder who knows nothing about the business or who has no value to add. The new shareholder is under no obligation to sell the shares he has inherited, and you will be stuck with him.
A properly drafted shareholders’ agreement can include provisions dealing with the death of a shareholder. For example, the remaining shareholders could be given an opportunity to buy out the deceased’s shares, to avoid the above scenario.
Can you force a shareholder to sell his shares?
The short answer – No unless you have a properly drafted shareholders’ agreement in place.
A shareholder cannot be forced to offer his shares for sale, even if he is:
- running another business in competition with your company
- dismissed for misconduct as an employee of the company
- convicted of a crime such as theft or fraud
- bankrupt
- incapacitated and unable manage his affairs.
Being unable to buy out such a shareholder could result in an awkward situation for the company, and negatively affect the business.
A properly drafted shareholders’ agreement can include provisions dealing with the above situations. For example, the remaining shareholders could be given an opportunity to buy the shares of the offending shareholder by way of a forced offer.
In addition to the issues discussed above, a shareholders’ agreement can also provide welcome certainty on practical issues, including:
- funding of the company, loan obligations and the terms of shareholder loans
- rules relating to suretyships and guarantees given by the company and shareholders
- protections for minority shareholders in certain circumstances, to avoid situations where the majority takes important decisions without their consent
- privileges for majority shareholders where permissible, to avoid situations where a minority can block a major decision
- appointment of directors and related issues.
If you do conclude a shareholders’ agreement, it is important that your company’s memorandum of incorporation is reviewed to ensure there are no contradictions between the documents. If there are, the relevant terms of the shareholders’ agreement will be void. Professional advice is recommended.
For more information on this, please contact your
local Moore firm.