Embarking on a new business venture is one of the most exciting events to any entrepreneur. Due to the overwhelming nature thereof, most individuals tend to seal business relationships with a mere verbal agreement and a handshake and without due consideration as to how the relationship might unravel in a few years.
The golden rule when entering into any business relationship is that one should always stay objective when concluding business agreements. Due to the initial excitement and enthusiasm, this is rarely the case.
It is well known that prevention is better than cure – which is why most disputes between business partners could have been prevented if they concluded a shareholders agreement before proceeding to conduct business.
What is a Shareholders Agreement?
A Shareholders Agreement is a contract concluded between shareholders to a company that formalizes the relationship and governs the duties and responsibilities between all stakeholders to the company.
What is the difference between a Shareholder and a Director?
There is a big difference between a shareholders and a director in a company. The shareholders own the company by owning its shares. Directors are appointed to run and manage the company. A person can be a Shareholder without being a director, a director without being a shareholder, or both a shareholder and a director.
A shareholder receives remuneration in the form of dividends (profit share), whereas a director receives a salary from the company and is regarded as an employee of the company.
Why do I need a Shareholders Agreement?
As mentioned above, a Shareholders Agreement formalise the relationship between all interest parties, by clearly setting out the rights and responsibility of each party as well as the manner in which profits will be shared. By concluding such an agreement, the parties can ensure that everything is transparent and that all parties are on the same page.
It also provides clear guidelines to follow if and when key decisions need to be made, or a dispute arise.
What is included in a Shareholders Agreement?
Although all Shareholders Agreements are different, there are a few generalities that one should ensure are included.
The Shareholders Agreement should clearly stipulate the regularity of the meetings, as well as how it is called. It is a good idea to provide for special circumstances where the members can deviate from the general rules, such as where a matter is so urgent that it cannot possibly hold over till the next meeting.
It is imperative that the Shareholders Agreement clearly stipulate the manner in which the profits are to be shared between the various shareholders.
The Shareholders Agreement should clearly stipulates the type of shares that are to be issued and allotted to each shareholder, as well as the amount that are to be paid in respect thereof and the manner in which it will be distributed. It will furthermore provide for guidelines that should be followed when a Shareholder wishes to sell his/her shares, and provide for a process to approve a buyer.
Board of Directors
The Shareholders Agreement governs the manner in which directors are appointed as well as the maximum number of directors that can be appointed to the board. It will also set out the manner in which the directors are removed and/or replaced, the extent of their duties and how the meetings can be arranged.
Deadlocks and Disputes
Disputes between Shareholders are inevitable. It is therefore critical that each Shareholders Agreement clearly provide guidelines to assist the Shareholders should a a dispute arise. Most agreements subject parties to alternative dispute resolutions, such as mediation, negotiation and arbitration, and only where the dispute is not resolved in that manner, will the parties be allowed to institute legal action.
What is the benefit of a Shareholders Agreement?
A Shareholders Agreement provides various benefits to the parties, such as:
- Reducing the risk for potential future disputes;
- Regulating and stipulating the rights and responsibilities of all interest parties;
- Providing clear guidelines where a shareholder wishes to alienate his or her shares;
- Providing shareholders with protection where the company is to repay a shareholder’s loan;
- Regulating the termination of the agreement, as well as the manner in which shareholders and/or directors can be removed.