Stephen Keogh, Managing Partner of law firm MHP Sellors explains why and when a Shareholders’ Agreement is required.
A Shareholders’ Agreement is, in effect, all about control and protection. As most companies grow beyond the founders, challenges around decision-making present themselves regularly. If a Shareholders’ Agreement is place at the outset, everyone has clarity on their position.
· What is a Shareholders’ Agreement?
It is a private contract made between the shareholders of a company and often the company itself, which governs how the company is run, protects shareholder investments, and establishes the parameters of the relationship between the shareholders.
· Do you need a Shareholder’s Agreement?
The Constitution is an obligatory document under the Companies Act 2014 which is publicly available and sets out the rules under which a company is governed. The Shareholders’ Agreement is a private document and for that reason it can contain more detailed information on the company and its members.
Why should you have a Shareholder’s Agreement?
1. Protection of investment
Shareholders’ Agreements are designed to protect a shareholder’s financial investment in a company, regulating where money can be spent and under what conditions. It also sets out what entitlement shareholders have to appoint directors to the board.
2. Business stability
A Shareholders’ Agreement details who is responsible for the day to day running of the company which gives stability to the bank, creditors and potential purchasers.
3. Intellectual Property
Individual shareholders often hold valuable rights which are used by the company in their personal name. A Shareholders’ Agreement can ensure that all such rights belong to and are to be transferred to the company or are held for the benefit of the company.
4. Minority Protection
They can provide for certain restrictions on the powers of the directors to act without the consent of specified shareholders.
5. Shareholder Exit & Valuation
Provisions can be made for share valuations in the event that a shareholder wishes to exit the business. It is also important to cover situations such as disability and death.
6. Cash flow considerations
A Shareholders’ Agreement protects the shareholder who wishes to exit as well as the remaining shareholders.
7. Keyperson Insurance
It is common to take out keyperson insurance on its more important management team members in case of death or incapacity.
8. Confidentiality and restrictive Covenants
In addition to covering confidentiality, a Shareholders’ Agreement may contain provisions preventing shareholders starting competing businesses or dealing with customers of the company if they leave the company.
9. Resolving disputes
A well drafted Shareholders’ Agreement will include provisions that pre-empt disagreements and set out how these should be resolved. This is particularly important in family-owned businesses.
10. Introducing new shareholders
A Shareholders’ Agreement should deal with the potential introduction of new shareholders and what happens to ownership percentages.
Shareholders can create a Shareholders’ Agreement at any time.
The author of this article, Stephen Keogh, Managing Partner MHP Sellors can be contacted on 065 684600. For more information on a Shareholders’ Agreement Email: email@example.com or Caroline Meaney, firstname.lastname@example.org