Shareholders Agreements – why you may need one

What is a shareholders agreement?

A shareholders agreement is a contract between some or all of the shareholders of a company and is binding only on those shareholders who are party to the agreement.  Sometimes the company itself can be a party to the agreement.

A shareholders agreement should be drafted in a way that is consistent with the Company’s constitution.

Why have a shareholders agreement?

• A shareholders agreement will provide for how the company will be managed.

• It will also look to the future and provide, in so far as it is possible, a set of rules for dealing with and resolving potentially divisive issues or future sources of conflict.

• The shareholders agreement also makes provision for how a shareholder may sell or transfer their shares in the future should they wish to exit the company. It is common in private companies for shareholders who want to sell their shares to be obliged to offer their shares to the other existing shareholders to allow them the opportunity to purchase them.  This is known as pre-emption rights.

• It is also usual to allow for certain situations whereby a shareholder will be compelled or forced to transfer his/her shares e.g. when an individual shareholder is also an employee of the company and that person’s employment with the company terminates.

• It provides for minority shareholder protection.

• It is a private document and is therefore not filed with the Companies Registration Office and so it is not subject to inspection by members of the public. As a result, highly sensitive company matters can be set out and agreed upon within the shareholders agreement.

Other commonly found clauses in a shareholders agreement include:-

• Non-compete provisions:- these clauses restrict shareholders from competing with the business of the company while they are shareholders and for up to two years thereafter;

• Board of Directors:- information relating to the Board of Directors to include its composition, rights of shareholders to appoint directors and how meetings are to be called;

• Information rights:- whereby a shareholder who is not a director will be entitled under the terms of the shareholders agreement to certain information relating to the business of the company such as annual budgets, management accounts, etc.

What if the shareholders agreement is inconsistent with the company’s constitution?

It is usual to have a clause in the shareholders agreement providing that in the event of conflict between the terms of the shareholders agreement and the company’s constitution, the shareholders agreement will prevail.  It is useful to draft such a clause in a manner that provides for such inconsistency, once identified, to be resolved by the shareholders using their voting rights to amend the company’s constitution to remove the inconsistency.

At Douglas Law Solicitors LLP we provide commercial law services to SMEs.  We will advise and assist you in relation to the preparation and drafting of a shareholders agreement to suit your particular requirements.

For more information please contact Gráinne O’Donovan on 021 489 7256 or by email at grainne@douglaslawsolicitors.ie