Why your company needs a Shareholders’ Agreement
It is true you know, it’s easier to agree on issues when everyone is on good terms and there are good vibes flowing amongst the parties in the early stages of company development. A well-drafted shareholders agreement will help formulate everyone’s feelings on scenarios that seem farfetched and way down the list of tasks that need to be considered in the early stages of company development. The issues dealt with in a shareholders’ agreement will flush out feelings and thoughts amongst the shareholders that would have otherwise gone undiscovered, at least until a dispute arises. In theory, having a well-drafted shareholders’ agreement means it will prevent such disputes which will ultimately mean the parties will not lose focus, and in turn, the company will continue to prosper without interruption.
What is a Shareholders’ Agreement?
A shareholders’ agreement is a contract between the shareholders and the company itself. The contract (shareholders agreement) sets out how the company will be run and manged and will proactively seek to deal with issues that will likely cause disputes amongst the parties in the future.
What is the Constitution of the Company?
The constitution is the document that binds the shareholders on formation of the company. While it’s true that the constitution will have certain cross-over with a shareholders’ agreement, constitutions are frequently adopted without modifications and exclusions being applied to the model form constitutions as provided in the Companies Act, 2014. Ultimately, just relying on such ‘model form’ constitutions, whilst keeping the costs of incorporation low, practically speaking will not adequately regulate the relationships of the shareholders.
Advantages of a Shareholders’ Agreement
- Privacy
The constitution of the company is a public document and is available through the Company Registrations Office. Therefore, sensitive information such a director’s remuneration, internal management policies are not suitable to be dealt with in the constitution. By contrast a shareholders’ agreement is a private document that will contain express confidentiality provisions itself.
2. Flexibility
Unlike the constitution, shareholders’ agreement can bind other parties interested in the company, such as the directors.
3. Certainty
The constitution can be amended by way of a special resolution, being a resolution that is passed by 75% or more of the shareholders present and voting at a general meeting. In contrast unless the shareholders includes a specific variation mechanism, such an issue can only be varied by unanimous agreement of the parties.
4. Common Provision in a shareholders’ agreement
It is beyond the scope of this article to consider in detail all the provisions found in a typical shareholders’ agreement.
Below is a list of the common issues that are covered in most standard shareholders’ agreements.
- Business Management
- Composition of the Board of Directors
- Convening / Conduct of Bord Proceedings
- Information Rights
- Dividends
- Finance
- Minority Protection
- Keyman Insurance
- Intellectual Property
- Issue of Shares – pre-emption rights
- Transfer of Shares – pre-emption rights
- Non-Compete Provision
- Dispute Resolution
- Alteration of Shareholders Agreement and conflict with Constitution
If you would like to put in place a shareholders’ agreement for your company, please contact dcunningham@cunninghamsolicitors.ie
The content of this article is provided for information purposes only and does not constitute legal or other advice.