Making sure your investment and business is secure.
A shareholders agreement is an essential document for protecting your business interests and reducing the risk of expensive disputes between you and other shareholders.
An effective shareholders agreement should clearly define how decisions will be made, new shareholder on-boarding procedures and what happens if a member leaves or passes away, amongst other things.
Getting an impartial business solicitor to tailor a comprehensive shareholder’s agreement covering these key issues could save you hours in negotiations further down the line – as well as helping you to avoid costly legal fees.
For help with a shareholders agreement template in Ireland, chat to our commercial law experts here.
Is it wise to draft your own shareholder’s agreement?
Yes, you can draft your own shareholder’s agreement. However, if you want to ensure that you have a strong agreement dealing with all the key issues, you need seek professional legal advice. This is because a shareholder’s agreements contain complicated clauses and regulations which can vary depending on the complexity, size and structure of your company. There is a whole host of complex issues such as what if there is stalemate between the shareholders? How do you value your business if one or more shareholders want to exit the business? What if one or more shareholders are taking more than their fair share from the business? What if simple negotiations between the shareholders is not working?
It is also advisable to hire an experienced lawyer who specialises in corporate law.
Is a shareholder’s agreement enforceable by law?
A shareholders agreement is legally binding, provided that each party has agreed to the contents, executed the agreement and it meets all legal requirements.
It can be enforceable in a court of law if any dispute arises or a breach of contract is committed by one or more shareholders.
The agreement should be reviewed regularly in order to ensure that it still meets all legal requirements and accurately reflects the shareholders’ and your business’s current objectives.
Why do you need a shareholder’s agreement
By having a detailed shareholder’s agreement, businesses in Ireland can protect themselves from potential disagreements or misunderstandings by establishing clear guidelines for all of the shareholders involved.
The agreement should lay out each of the shareholder’s roles and responsibilities and set out what will happen if someone wants to leaves the company.
This helps to ensure that everyone is on the same page and has a clear understanding of their rights and obligations. Additionally, it helps to create an environment of trust and respect between all shareholders.
With a comprehensive shareholder’s agreement in place, it minimises the risk of future disputes.
Having this document properly prepared by experienced legal professionals is essential for any shareholder looking to safeguard their interests.
What to put in a shareholder agreement template
Your template should include the following information:
- identifying the company and the shareholders
- determining who owns how many and what type of shares
- how to proceed in the event of the death of a shareholder
- understanding share value if transfers are not allowed
- clarifying shareholders’ roles, responsibilities, and involvement in other aspects of the business
- establishing when the agreement will start as well as its duration
- establishing a process for allocating capital when needed
- clauses to protect minority shareholders or increase majority control
- setting out dividend payment policies
- deciding on dispute resolution strategies and outcomes
- detailing requirements for buying, selling, transferring or issuing shares
- outlining rights and responsibilities of directors or employees who are also shareholders
- defining decision-making processes to guide company direction
- ensuring privacy and confidentiality is respected
Pre-emption rights allow existing shareholders the right to buy shares of a company prior to them being offered to any other party.
This ensures that the existing shareholders have the opportunity to retain their proportional ownership in the company before it is sold or issued to outside investors.
Pre-emption rights also provide stability in the ownership structure of a company and protect minority shareholders from dilution, depending on the circumstances of the selling shareholder. Very often a shareholder’s agreement will seek to override pre-emption rights or include specific rules and regulations in relation to pre-emption.
Disputes between shareholders
Shareholder disputes are common as the goals and interests of shareholders evolve.
When decision-making powers differ according to a shareholder’s level of involvement, disagreements can arise regarding salaries, bonuses and dividends amongst other issues.
Fortunately, clauses in the shareholder’s agreement can provide protection for all shareholders and help avoid conflict or at least provide a mechanism for solving those issues.
Any shareholder’s agreement should include a suitable dispute resolution procedure for the shareholders.
Detail how shares can be transferred
Transfer of shares can have a significant impact on the company’s ownership structure.
Depending on the shareholder’s agreement, these transfers may be limited and subject to certain conditions.
For unintentional transfers, such as those due to death or bankruptcy of a shareholder, restrictions can be put in place to ensure no disruption is caused to other shareholders for example, ensuring that the remaining shareholders have a right to acquire the exiting or deceased shareholder’s shares at market value.
Intentional transfer rights and powers can also be established in order to avoid potential disputes amongst shareholders and protect against decisions made for personal gain.
The future of the business
Businesses often go through changes as they grow and evolve, but certain adjustments can be riskier than others.
When shareholders take on new roles or invest in majority-owned businesses, clear parameters need to be put in place.
The terms of a shareholder’s agreement should therefore include provisions for when investor-consent is necessary for certain company changes.
A corporate plan, produced and approved by the board on a regular basis, can ensure that business direction is managed effectively and fairly.
What if a shareholder’s role changes?
A board of directors is responsible for overseeing and managing the business operations.
A shareholder agreement should specify a director’s responsibilities and limits when it comes to decision-making.
Shareholders may choose to be involved in the company on varying levels, such as functioning as directors, offering advice, or merely providing financing.
The agreement should reflect expectations regarding a shareholder’s involvement in day-to-day management decisions and what happens if they want to reduce or increase their involvement over time.
Shareholders and lenders
When a shareholder is both a lender and equity provider to the business, the terms of the agreement should reflect what happens if their circumstances change.
It’s important to set up protective measures that allow all parties involved to benefit from any revised arrangement or terms. These changes could include modifications or updates in financial responsibilities, voting rights, and more.
Your shareholder’s agreement should include provisions that cover potential future events such as the sale of the company or shares held by one party being purchased by remaining shareholders.
Additionally, consider what obligations shareholders may have in the event of a company’s winding up or examinership, including potential liability and how any residual assets are divided.
Your shareholder’s agreement should include details about what happens if any former shareholders attempt to compete directly with your business.
This could include prohibitions on using confidential information, contacts, or techniques learned during their time as a shareholder, and competitive non-disclosure restrictions.
Additionally, you may consider an equitable remedy such as injunctive relief for any breach of the terms by a departing shareholder.
Draft a shareholders agreement
A commercial solicitor can provide you with a shareholder’s agreement template, outlining the key elements that should be included based on your particular circumstances.
This document can be tailored to suit the specific needs of your business, and your lawyer can advise you on what questions you should ask yourself in order to ensure that all interests are fully protected.
It is important to consider who has power over certain events and decisions if they are to occur, such as the sale of the company or another shareholder buying out existing shareholders.
Shareholder’s agreement and company Constitution
You should consider these two documents together when drafting a shareholder’s agreement.
Private companies in Ireland are required to submit a Constitution in accordance with the Companies Act 2014.
The company’s Constitution is a legal document for limited companies in Ireland that is submitted to the Companies Registration Office and is publicly available, whilst a shareholder’s agreement is a private document that outlines your shareholder relationship.
The shareholder agreement is designed to regulate the relationship between shareholders and protect them from breaches of contract, whilst the Constitution sets out rules about how the company should be run.
According to the Irish Companies Act 2014, the Company Constitution binds shareholders to the company.
It’s important to consider both documents in order to ensure that all interests are protected and that any disputes can be resolved effectively.
To ensure that the shareholders agreement takes precedent in the event of any conflict between the two documents, you can include a term in the agreement stating that if there is an inadvertent conflict, then the shareholder’s agreement will prevail.
This allows shareholders to be certain that any dispute or disagreement will be settled by following the provisions of the shareholder’s agreement.
What if you are a minority shareholder?
As a minority shareholder, you should be aware of key components of a shareholder’s agreement. These include:
- rights and responsibilities related to voting power
- definition of the scope and purpose of the company
- procedures for modifying or revising the shareholder’s agreement
- restrictions on the transfer or issuing of shares
- rights related to dividends and liquidation
- liability protection for all parties involved
- procedures for resolving disputes between shareholders
- requirements for a change in control or ownership structure and
- provisions about confidentiality and non-competition clauses
The above are important considerations whether you are a minority shareholder or a majority shareholder.
What are the different types of shareholder agreement?
In order to create an effective shareholder agreement template, you should consider the relationship between shareholders.
Majority shareholder / minority shareholder
A majority shareholder is a shareholder that owns more than 50% of the shares of the company. A minority shareholder is, of course, one that owns less than 50% of the company.
A pre-incorporation/formation agreement
Is an agreement between individuals who intend to form a company and become its initial shareholders.
A subscription and shareholders’ agreement
This is a contract between parties who are subscribing for shares at the same time that they enter into the shareholders’ agreement.
When there is a 50/50 shareholding position or there are other equal minority shareholders also known as stalemate.
For expert advice on creating your shareholders agreement, get in touch here.