Top 5 Reasons Why You Need a Shareholders’ Agreement And One Reason Why You Don’t

A Shareholders’ Agreement is a contract between the shareholders of a company. It governs the manner in which shareholders agree the company will be managed and how they will deal with certain specific issues which might arise. It is supplemental to and usually partly overrides the company’s constitution. There are many reasons why all or some shareholders may wish to put such a contract in place. Our top five are detailed below:

You might fall out

It might be hard to imagine or even difficult to think about but sometimes, despite starting with mutual understanding and shared interests, conflicts arise. The consequences for all involved can be devastating, public and very expensive. Having a Shareholders’ Agreement allows the shareholders decide how to deal with a divergence if it does arise. Often, everyone involved at the beginning of a company’s life believes that they don’t need a written agreement as they are on the same “page”.  As a company develops and grows it may become more difficult to make decisions and once cracks begin to show it will be more difficult to harmonise decision making.

Protection for the minority

Without a Shareholder’s Agreement a minority shareholder has quite limited rights under Irish Company Law.  A Shareholders’ Agreement usually contains restrictions on directors’ powers to act without the consent of a specified percentage of shareholders.  The types of restrictions include for example; making material changes to the business; incurring expenditure over a certain level; the pay of directors; restrictions on the sale or transfer of shares and payment of dividends. Such provisions are commonly used to protect shareholders from unforeseen changes taking place without their knowledge or consent.

Employment link

If shareholders are also employees of the company there are a number of advantages to having a shareholder’s agreement. Sometimes the advantages are only obvious when the employee leaves the company. For example: a Shareholder’s Agreement commonly requires ex- employees to sell shares they hold back to the company.

Non-compete and other restrictions

Shareholders may have other interests and decide to put other interests in a competing business ahead of the company. In the event of a shareholder leaving the company restrictions such as a non-compete can be valuable in protecting the business of the company.

Demonstrates good planning

The simple fact that shareholders have such a contract in place demonstrates a stable business and is a positive reflection on the company from the point of view of investors and banks or other potential creditors.

And finally, the top reason why a company shouldn’t have a shareholder’s agreement?

A badly drafted agreement is worse than no agreement at all

This can be said about most contracts but is hugely significant here. It is critical that the drafting of the Shareholders’ Agreement does not cause the very problems that it was put in place to avoid. If the agreement is not drafted to avoid inconsistencies with the constitution of the company or fails to clearly provide for the intentions of the parties, it does not fulfil its purpose. If terms of the agreement are unclear this may lead to disputes about their meaning resulting in getting a Court involved in interpreting what the parties meant. A good lawyer will help avoid this by putting in place a clearly prepared agreement which will represent the wishes of the shareholders.

If you wish to discuss creating a Shareholders’ Agreement or if you are already experiencing the fall out of not having one, contact Patricia Heavey, partner at Patrick F. O’Reilly & Co., to discuss your options. Patricia has extensive experience dealing with all types of Commercial Litigation with emphasis on employment and contractual issues. to discuss your options.