Shareholders’ Agreement- Scope and importance
No person gets married expecting a nasty divorce several years down the line. Similarly, no one expect their other half will go on unbridled spending spree on their joint account or waste the family assets... but is there anything can be used to prevent such occurrences? Following the enactment of the the Matrimonial Property Act, 2013 and the Marriage Act, 2014, some couples have resulted to negotiation of pre-nuptial agreements in an effort to minimize such occurrences.
What about in a company business? It is common for shareholders to disagree on the business(es) of the company or methods of carrying on the same or on their decision making powers. Moreover, the directors may act alone and bind the company to the detriment of shareholders. A well crafted shareholders’ agreement at the onset may provide for these and other important matters thus minimizing expensive legal battles. More importantly, shareholders’ agreement can prevent disputes arising altogether by ensuring that all shareholders’ knows in advance their rights and obligations vis-a –vis those of others or different organs of the company. In other words, a shareholders’ agreement also define what level of control a shareholder has over the business affairs of the company and the management.
During the negotiation of a shareholders’ agreement, the shareholders are in a way educated, or reminded, on how to run their company in a prudent and professional manner and the principles of the company law that guide their interactions with one another and those entrusted with the management (the board ).
Unfortunately, many investors do not negotiate a suitable shareholders’ agreement to guide them and their company when they start business. This explains the many messy disputes in private or family companies, some of which have been highlighted in the media.
In some cases, the success of a company may be heavily dependent on funding of a single shareholder or two. If they depart suddenly, for instance due to death or retirements, the business may be affected adversely or even collapse. Or it might be that the dependents of a deceased shareholder may be relying on capital tied up in the business of the company in the event of the shareholder’s death. However, if such a situation is not covered in a shareholders’ agreement, it might be very difficult to get the money out of the company and the remaining shareholders may continue enjoying the money -interest free, at the expense of the dependents.
Unless there is a shareholders’ agreement there is nothing to stop a fellow shareholder in a private company from selling their shares to a total stranger who may not have a common vision with the other shareholders. Moreover, if a fellow shareholder would never voluntarily sell their shares, if there were to lose their shares, for instance in a divorce or other legal administrative procedure, the former spouse or a court appointed administrator, may end up owing those a shares. A shareholders’ agreement can prevent such a scenario.
While setting us a company, the dream of the investors might be to run the business for a number of years and then sell it as a going concern for millions of shillings. But even if the company is hugely successful, shares in a private company may be worth very little unless all, or a certain majority of shareholders, agree to sell together. A shareholders’ agreement can prevent an adamant minority shareholder from having the ability to spoil the deal of a lifetime.
A shareholders’ agreement will normally provides for a number of situations that will hopefully never arise. However, they provide a detailed road-map on how to handle such situations should they arise.
A shareholders’ agreement will usually supplement the provisions of the Company’s articles of association, and unlike the latter the same is a private document and is not required to be filed with any public registry.
In brief, a shareholders’ agreement will -
No person gets married expecting a nasty divorce several years down the line. Similarly, no one expect their other half will go on unbridled spending spree on their joint account or waste the family assets... but is there anything can be used to prevent such occurrences? Following the enactment of the the Matrimonial Property Act, 2013 and the Marriage Act, 2014, some couples have resulted to negotiation of pre-nuptial agreements in an effort to minimize such occurrences.
What about in a company business? It is common for shareholders to disagree on the business(es) of the company or methods of carrying on the same or on their decision making powers. Moreover, the directors may act alone and bind the company to the detriment of shareholders. A well crafted shareholders’ agreement at the onset may provide for these and other important matters thus minimizing expensive legal battles. More importantly, shareholders’ agreement can prevent disputes arising altogether by ensuring that all shareholders’ knows in advance their rights and obligations vis-a –vis those of others or different organs of the company. In other words, a shareholders’ agreement also define what level of control a shareholder has over the business affairs of the company and the management.
During the negotiation of a shareholders’ agreement, the shareholders are in a way educated, or reminded, on how to run their company in a prudent and professional manner and the principles of the company law that guide their interactions with one another and those entrusted with the management (the board ).
Unfortunately, many investors do not negotiate a suitable shareholders’ agreement to guide them and their company when they start business. This explains the many messy disputes in private or family companies, some of which have been highlighted in the media.
In some cases, the success of a company may be heavily dependent on funding of a single shareholder or two. If they depart suddenly, for instance due to death or retirements, the business may be affected adversely or even collapse. Or it might be that the dependents of a deceased shareholder may be relying on capital tied up in the business of the company in the event of the shareholder’s death. However, if such a situation is not covered in a shareholders’ agreement, it might be very difficult to get the money out of the company and the remaining shareholders may continue enjoying the money -interest free, at the expense of the dependents.
Unless there is a shareholders’ agreement there is nothing to stop a fellow shareholder in a private company from selling their shares to a total stranger who may not have a common vision with the other shareholders. Moreover, if a fellow shareholder would never voluntarily sell their shares, if there were to lose their shares, for instance in a divorce or other legal administrative procedure, the former spouse or a court appointed administrator, may end up owing those a shares. A shareholders’ agreement can prevent such a scenario.
While setting us a company, the dream of the investors might be to run the business for a number of years and then sell it as a going concern for millions of shillings. But even if the company is hugely successful, shares in a private company may be worth very little unless all, or a certain majority of shareholders, agree to sell together. A shareholders’ agreement can prevent an adamant minority shareholder from having the ability to spoil the deal of a lifetime.
A shareholders’ agreement will normally provides for a number of situations that will hopefully never arise. However, they provide a detailed road-map on how to handle such situations should they arise.
A shareholders’ agreement will usually supplement the provisions of the Company’s articles of association, and unlike the latter the same is a private document and is not required to be filed with any public registry.
In brief, a shareholders’ agreement will -
- Define the business(es) of the company and the method(s) of carrying on the same;
- Provide for reserved matters which will require agreement of all shareholders, or a certain majority;
- Set out the powers of the board vis-a- vis the shareholders in general meeting;
- Define the funding and dividend policies;
- Provide for methods of resolution of disputes between shareholders including how to handle a deadlock situation;
- Prevent the situation where changes in one shareholder’s personal circumstances can have an adverse effect on the company or other shareholders; and
- Set out the limits and procedures for how the company should be operated.
Most importantly, a shareholders’ agreement is there to ensure that the company’s decisions enjoy a particular level of consensus and discussion rather than one-sided imposition. It will also provide for clarity and certainty to a shareholder as to what he/she can or cannot be done, thus eliminating unnecessary conflicts and misunderstandings.
The cardinal rule is: hope for the best put prepare for the worst! Are you prepared?
You can get touch with the writer via mainacy@gmail.com for more guidance on preparation of a suitable shareholders’ agreement for your company.
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