A shareholders' agreement is the equivalent of a partnership agreement where the trading entity is incorporated. As such, it is equally essential to a partnership agreement and fulfils a similar but not the same role.
Typically a shareholders' agreement will regulate the rights between the shareholders and sits 'on top' of the company's articles of association which it will normally prevail over. Since it is outside the scope of registration requirements under the Companies Act, it has the advantage of being private and will often contain detailed provisions as to rights of transfer of shares, regulation of the business itself, business plan, reserved or veto rights and any other matters for which the shareholders wish to provide. Since it is binding on the shareholders as a contract, its flexibilty makes it a useful tool not only in start up situations but for ongoing businesses.
Where different businesses or individuals have pooled their contributions for a particular purpose it will contain project-specific provisions as a joint venture agreement.
A considerable advantage of a shareholders' agreement is that it can help to prevent complaints of unfair prejudice since it can provide a right of involvement in management and appropriate exit routes.
There are three main instances where you will require a Shareholders Agreement and they are as follows:
- Quasi Partnerships - this arises when a small number of owners also share the management of a company. The result is that principles of partnership law and a requirement of fair conduct overlay the strict principles of company law. The exclusion of anyone from participating management can give rise to a claim of unfair prejudice.
- Investment Agreements - these will govern the rights and obligations of investors and other shareholders in respect of the initial investment, the ongoing business of the company and any exits of the investors or other shareholders.
- Joint Ventures - when two companies have an idea for a new business they may wish to conduct that new business through a separate new company for which each of their companies will be a shareholder. A Joint Venture Agreement will detail the relationship between the two parties stating the roles and responsibilities that will be required of each company during the joint venture and details of any financial rewards to each of the shareholding companies. A typical example would be one of the companies may bring the property and the other company may bring a work force and know-how.
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