David Waitley said, “Expect the best, plan for the worst and prepare to be surprised.” This statement should be the mantra of any person starting a company with somebody else. All relationships have the capacity to end: friends, spouses, children, you name it, anyone can turn their back on you. You may think that when it gets to that point, you would just remove the troublesome shareholder and life would move on. However, it is not as easy as it seems, since, unless a shareholder signs to hand over their shares, they cannot be arbitrarily deprived of their property. Instead of having to get to the point of selling majority shares at a discounted price, being declared insolvent, wasting money on multiple suits, or even ending up in jail, you could enter into a shareholders’ agreement.
A shareholders’ agreement is a private agreement between the shareholders that sets out how the shareholders will relate to each other and how they will manage the company. It regulates the shareholders’ relationship with each other and with the company. It can be between all shareholders or some of them (for example, owners of a certain class of shares). In reality, it is more or less like a partnership agreement. It is ideally signed at the formation of the company. It could also be signed when a new shareholder joins the company. Its main purpose is to protect the shareholders’ investment in the company, to establish a fair relationship between the shareholders, and to generally govern the running of the company.
Being a private contract, the shareholders can include any provisions that they find relevant to their circumstances. It could include
- the appointment of directors and management team of the company;
- allocation of key roles or responsibilities;
- provision of extra benefits or bonuses, especially where some shareholders are serving as full-time employees;
- bank account management;
- capital and financial contributions;
- share transfers;
- voluntary exit and removal of existing shareholders;
- addition of new shareholders;
- conflict of interest provisions;
- dispute resolution mechanisms;
- and termination of the agreement.
It could also include measures to protect the minority shareholder(s), such as a requirement that certain decisions must be unanimous. However, making all decisions unanimous will prove frustrating in the future, hence a provision for a simple majority win in most decisions is most helpful.
A shareholders’ agreement proves advantageous in that it is a private document, and can be kept confidential, especially where it contains sensitive commercial details. This can be done by including a provision that states that leaking of these details amounts to breach of the contract. Further, it can be easily amended by the shareholders upon mutual agreement. It can also be used to regulate issues that are unique to the company and its shareholders such as permitted investments. It can be customized to suit the company and its needs. Additionally, it protects the shareholders from infringement of their rights by other shareholders, and guarantees that they will have their say, if not their way.
Tennessee William said, “We have to distrust each other. It is our only defense against betrayal.” Although signing a shareholders’ agreement may look like a sign of distrust between yourselves, prevention has always been better than cure. In any case, it can be amended at any time, hence there is no permanent restriction to yourselves.
By Felicia Solomon & Victory Wanjohi