Shareholder Agreements

We recently presented a course on succession planning and one question to come out of it was “Do I need a shareholders agreement and what is it?”

In its simplest form, a shareholders agreement is a private arrangement among the shareholders of a Company. A Company Constitution is a public document that is registered with the Registrar of Companies.

The shareholders agreement is often viewed as a document in the negotiation phase of forming a Company, and as such it can isolate any differences that may occur downstream.

Take this example of a florist business that didn’t have a shareholders’ agreement.  There were 3 shareholders; one died (no pre-emptive rights). He left his shares to his daughter who didn’t want to be there, the other two shareholders couldn’t afford to buy her out, so she sold her shares to an opposition company. The opposition made things tougher, one of the other shareholders walked away, and the remainder of the original three was forced to borrow money to buy out the balance of the other two shareholdings, just to keep the doors open.

A shareholders agreement would have helped because:
- pre-emptive rights
- dispute resolution procedure
- insurance
- approval thresholds for major decisions.

So if you go into business and you do nothing else, always have a shareholders agreement, because they are worth their weight in gold.