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To provide guidance for companies, the key benefits and features of a shareholders’ agreement, when and why they are used and their practical application to many challenges that face private companies in Ireland are examined.
What is a Shareholders’ Agreement?
A shareholders’ agreement is an agreement between the shareholders or owners of a private company limited by shares (known as LTD companies) setting out certain contractual provisions as to how a company will be managed and controlled. The provisions in a shareholders’ agreement can sometimes vary legislative provisions found in the Companies Act 2014. For example, under the Act, a chairperson of the board will have a casting vote and this may be varied in a shareholders’ agreement to state that for the relevant company, the chairperson will not have a casting vote at meetings.
A shareholders’ agreement will sit alongside a company’s constitution although generally it will take precedence over a constitution in the event of a conflict in provisions. A shareholders’ agreement is meant to deal with matters which might arise in the future in relation to the company and usually the company will be a party to the agreement along with its shareholders.
Why are Shareholders’ Agreements Used?
There are many reasons why the shareholders of a company may decide to put a shareholders’ agreement in place, including as follows:
Outline a Legal Framework
Founders of a newly incorporated or an existing company may wish to outline a legal framework as to how the company will be managed and make provision for board appointments, management and control and exit mechanisms for shareholders including pre-emption rights.
Provision may also be made for the declaration of a dividend, future funding, information rights for shareholders, the admission of new shareholders through funding or otherwise, post shareholding restrictions including non-compete provisions, dispute resolution and confidentiality (among other provisions).
New Shareholder Subscribes for Shares
A shareholders’ agreement may be used where a new shareholder is subscribing for shares in a company. Sometimes the share subscription will be carried out at the same time as the shareholder arrangements are agreed to.
This may be done where there is an equity investment by a new shareholder whereby new securities are issued to an investor shareholder in exchange for subscription monies being advanced to the company. This type of arrangement may also be used where shares are issued to employees or executives in a company.
Offer Contractual Protection to a Minority
In a minority / majority shareholding, a shareholders’ agreement, as well as offering certainty to the majority in terms of a future transfer of shares, can also offer contractual protection to a minority including an investor. Where a minority shareholder seeks to have contractual protection under a shareholders’ agreement, it will be important for the shareholder majority to consider the inclusion of certain reserved matters and the granting of a veto right to an investor minority.
The majority shareholders will not want to give up any or too much control and these requirements need to be balanced with the equity investment and funding sought.
Joint Venture Arrangement
A joint venture arrangement is one which is entered between shareholders, sometimes within a special purpose company and can be entered on a 50:50 basis or on a majority: minority basis.
In general, a joint venture shareholders agreement will contain many of the same provisions as a normal shareholders’ agreement with some additions to cover default of arrangement, termination and exit, and share transfers. There may be other ancillary agreements including funding or sale and distribution arrangements.
Legislate for Common Company Challenges
In all cases a shareholders’ agreement is meant to deal with certain events common to companies, specific issues that may be relevant to a particular sector and legislate in the document, what will happen upon their occurrence. For example, if an executive is allotted shares in a company, the underlying agreement may make provision for an obligatory transfer of shares upon the executive’s exit from employment.
Retain Certain Provisions in a Private Document
A shareholders’ agreement is a private document that is personal to the parties and binding on them. Companies can make provision for transfers of shares and exit provisions such as good and bad leavers in its constitution, but companies might prefer to retain certain provisions which are commercially sensitive in a private document.
As a constitution is publicly filed it is available for any third party to view and can be amended by way of a special resolution of shareholders (75% of shareholders vote in its favour). A shareholders’ agreement can only be amended by the parties to it agreeing to the amendment.
Conclusion
A shareholders’ agreement is an important document with many advantages. The application of the terms of such agreements can have subtle application to shareholders and knowledge of the common issues that can affect shareholders is advantageous prior to drafting or agreeing terms.
Further Information
For further guidance on shareholders’ agreements or for any ancillary advice, please contact Gríana O’Kelly, Head of Corporate & M&A and Commercial Contracts.