What is a Shareholders Agreement?
A shareholders agreement is a legal document that outlines the rights, responsibilities, and obligations of shareholders in a Company, as among themselves.
What is covered in a Shareholders Agreement?
The shareholders agreement mainly covers the following three areas:
- How the company is to be run.
- Who has what authority.
- What happens in the event of dispute.
Is it necessary to have Shareholders Agreement?
To some extent yes and no; No, because its not a legal requirement in Kenya. Yes, because its advisable and recommended, for companies with more than one shareholder (more so for companies with complex ownership structures with multiple shareholders), investor funded companies and companies with multi-national shareholders.
What happens where there is no Shareholders Agreement?
Without one, your company will be governed by the Articles of Association (Model) and the principal legislation governing Companies i.e. the Companies Act (CAP 486), which may not accurately reflect the intentions, duties and/or preferences of the shareholders.
In what instances is a Shareholders Agreement Necessary?
While not mandatory, a shareholders agreement is highly recommended especially in the following instances:
- Unequal ownership
When company has varying ownership percentages with minor and majority shareholders (or varying classes of shareholders), a shareholders agreement ensures that every shareholder understands their voting rights, control and profit distribution.
- Complex business structures
Companies that have intricate ownership structures, subsidiaries and intellectual property are recommended to have shareholders agreements to ensure there are clear lines of operational, control, dispute resolution and profit sharing.
- Family or closely related shareholders
Starting and running a company with family or friends often times entails jumping through multiple hoops. A shareholders agreement establishes clear boundaries and prevents future conflicts and misunderstandings.
What should go into a Shareholders Agreement?
- Ownership & Share Distribution
This clause will usually define how the company’s shares are allocated among the shareholders and may cover the following: allotment of new shares, transfer restrictions and pre-emptive rights.
- Roles and Responsibilities
This clause provides for the roles and responsibilities of each shareholder, including any specific contributions they’re expected to make during the set up or running of the company.
- Dividends and Profit Distribution
The clause establishes how the Company’s profits will be distributed among the shareholders, as well as any rules or conditions for declaring and distributing dividends.
- Dispute Resolution
The clause includes mechanisms for resolving disputes among shareholders for example arbitration, mediation and conciliation. This serves to avoid litigation and legal conflicts that could put it in disrepute or otherwise harm the company.
- Financing
The clause address ways through which the company secures funding for example loans, capital calls, allotments e.t.c. and how this is likely to affect existing shareholders and present ownership structures.
- Exit Strategies
This clause addresses the question of what happens when a shareholder voluntarily or involuntarily exits or wishes to exit the company or for example they die? In such events, how will their shareholding be valued? What rights accrue to such shareholders?
- Conflicts of interest & Non-competes
This clause would typically address management of conflict of interests at shareh0older level and may restrict them from engaging in competing businesses.
What is the best time to implement a Shareholders Agreement?
As early as possible especially during company set up when the first shares in the company are allotted. That said, it is never too late to have one in place for your company.
For more insights pertaining to this matter, you can reach the writer at Mwenda@mmsadvocates.co.ke . You can also contact us at MMS Advocates, Lower Duplex Apartments, LOWER HILL ROAD, or email us at info@mmsadvocates.co.ke