Good fences make good neighbours, and when it comes to business, good shareholder agreements make good partnerships. Not only does a shareholder agreement outline what each party agrees to, but it offers crucial protection for you, your partner and your business in the event of unforeseen circumstances. And let’s face it, no one goes into a partnership foreseeing the circumstances that will end that happy union. A shareholder agreement deals with the relationship between shareholders and the relationship of shareholders with the company.
It deals with the ownership of shares, the disposition and alienation of shares, the management of a company, meetings of shareholders and directors, voting rights at such meetings, the composition of the board of directors and the dividend policy of the company.
A spokesman from Cliffe Dekker Attorneys, one of the largest corporate law firms in South Africa, advises that: “The drafting of shareholder agreements is complex and adviceshould be sought from a properly qualified practitioner or firm as each case should be evaluated and dealt with on its own merits.” The firm has put togetherthe following outline of what may typically be found in a shareholder agreement.
A shareholder agreement should deal with the share capital of a company and must record the number and nature of shares in issue and/or subscribed for and the number and percentage held by each shareholder. It should also set out whether there are different classes of shares (such as ordinary shares and preference shares) and the rights attached to those classes.
The document should stipulate the size of the board, state which of the shareholders is entitled to appoint directors and provide for the removal and replacement of directors. It would also typically include provisions relating to the quorum at board meetings and the voting powers of directors.
It should outline how shareholders’ meetings are to be held, what will constitute a quorum, how proxies will be treated and what will occur in the event of a deadlock. Some of the mostimportant provisions of a shareholder agreement from the perspective of a minority shareholder are those relating to minority protections.
Generally such clauses stipulate that the directors and shareholders will not be entitled to pass resolutions on certain reserved matters without the consent of a specified percentage of the shareholders. For instance, if the specified percentage is 80%, a shareholder holding 25% of the issued share capital of the company willbe able to prevent the passing of a resolution.
Dividends/payments to shareholders
The dividend policy of the company should be set out in the shareholders’ agreement – that is, the circumstances underwhich a company will declare dividends. It is often provided that a company will not declare dividends if it owes any amount on a loan account to its shareholders or if it is indebted to any third party lender.
The management provisions of a shareholder agreement usually state who is responsible for the day-to-day management of the company (overall responsibility for the management of the company resides withthe board of directors), the identity and appointment of the managing director and senior executives, the manner in which the annual budget of the company is approved, the appointment of the auditors of the company, how the audit of thecompany will be conducted, the furnishing of management accounts and reports tothe board and the shareholders.
Transfer of shares
A shareholder agreement usually providesfor ‘rights of first refusal’, otherwise known as pre-emptive rights, which means that if a shareholder wishes to dispose of his shares, he first has to offer them to the remaining shareholders at the price he has been offered for them by an outsider. He is not allowed to sell to the outsider at a lower price or on better terms than those offered to the remaining shareholders.
The deemed offer, or forced sale,provisions of a shareholder agreement play an important role. For instance, the shareholder agreement can state that if the BEE level of shareholders is reduced below a certain level, the shareholders will be deemed to have offered to sell their shares to the other shareholders on the occurrence of the event which led to the reduction of the BEE level. The deeming provisions can also stipulate other trigger events which can give rise to a deemed offer (such asinsolvency, change of control, the resignation of an executive who is also a shareholder). These provisions should also state how the purchase price will be determined in the event of a deemed offer.
Shareholder agreements often include clauses which provide that under certain specified circumstances, where majority shareholders sell their shares, the minority shareholders can arrange to be bought out on the same terms (tag-along). The come-along clause states that if majority shareholders wish to sell their shares to a third party who wants to purchase 100% of the share capital of the company, the majority shareholders can require that the minority shareholders also sell their shareson the same terms.
Shareholder agreements contain various other provisions, including provisions relating to breaches of the agreement, the remedies for such breaches and dispute resolution.
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This is a brief summary of some of the more important principles which might be set out in a shareholder agreement. There are myriad ways in which one can be structured. For more information go to www.cliffedekker.com.