There are many obvious advantages to having a Shareholder Agreement in place such as clarity, harmony between shareholders and written evidence of shareholder intentions. There following advantages of a Shareholder Agreement may be less obvious to the lay person.
The Company Constitution can be changed by way of a special resolution which requires 75% of the voting shareholders’ consent, however a Shareholder Agreement can only be changed with the consent of all parties to the Agreement, otherwise known as a unanimous decision. This provides comfort to the parties to the Shareholder Agreement, knowing that no changes can be made to their agreement by the rest of the parties, without their knowledge and consent.
It can be tricky, particularly in companies with equal owners, to come to an agreement in certain circumstances. A Shareholder Agreement can provide a clear procedure for resolving a dispute. Where a dispute cannot be resolved, the Shareholder Agreement will also outline what steps need to be taken as a last resort in the case of a deadlock. Parties to the Shareholder Agreement can take comfort in the fact there are options in the case of a disagreement or fundamental dispute.
The Company Constitution is a publicly-accessible legal document, held at the Companies Registration Office. In contrast, a Shareholder Agreement is a private Agreement, only accessible by the parties thereto or by their personal representatives. The public have no right to access this document and it need not be submitted to the Companies Registration Office.
The Shareholder Agreement is a written contract which is executed as a deed. This means it is enforceable under law, so the parties to the Agreement can rest assured that no deviations from the Agreement can take place without triggering legal action.
Should a company be invested in, or obtain a grant from a third party, the investor may require that the company make certain commitments as to how the company is run to ensure their investment is protected and given the best chance for a return on investment. These provisions can be included in the Shareholder Agreement.
The Company Constitution must follow a specific form under the Companies Act 2014. However, a Shareholder Agreement does not need to follow any prescribed format and can be tailored to the specific needs of the Company in question and the parties involved.
Rights for Minority Shareholders
A Shareholder Agreement can include additional rights for minority shareholders that may not be provided for automatically. For example, Drag Along and Tag Along rights provide rights to minority shareholders and can be provided for in the Shareholder Agreement. The minority shareholders, if party to a Shareholder Agreement, may even get increased rights to access financial information about the company or be able to avail of pre-emption rights.
Assisting with a Sale of the Company
Normally, when a potential buyer for a company comes along, they want to buy the entire company, not just a majority stake in the company. Having Drag Along rights in a Shareholder Agreement make provision for a forced sale of the minority stake in the company should the majority decide to sell. This ensures a smoother, faster and cheaper sale as there need be no negotiations with the minority shareholders. The Drag Along right will even ensure the minatory shareholders can avail of the same conditions of sale as the majority.
There are some conversations that, let’s face it, we don’t like to have but sometimes they are necessary. For example, shareholders should consider where their shares go in the event of their passing or incapacitation. Another possibility is the breakdown of relationships. Regardless of the relationship between the shareholders in a company; whether best friends, spouses, siblings, parents and children, or even trusteed business partners, relationships can change. A Shareholder Agreement ensures that if these dreaded events take place there are clear, agreed procedures for what happens next.
Disadvantages of a Shareholder Agreement
It is not possible to come up with any disadvantages of a Shareholder Agreement due to the range of protections it can offer to each of the parties to it, including minority shareholders who are usually overlooked. Merely relying on the Company Constitution can be very limiting to your rights as a shareholder and we highly recommend putting a Shareholder Agreement in place to secure the future of your company and to protect your interests as an owner.
We would be happy to discuss the many advantages of a Shareholder Agreement with you in more detail. Please Contact Us or call on 01-2405277 for more information.