Shareholder Agreements are an ideal way to provide clarity and maintain harmony amongst the shareholders within a company. The Shareholder Agreement is a private, legally-binding deed and is not publicly accessible, unlike the Company Constitution which can be accessed by anyone at any time.
The anatomy of the Shareholder Agreement itself can be tailored to your company’s specific needs, however, there are some sections that we deem as critical to include, and so we have included them in our standard Shareholder Agreement. This blog will explain the purpose of each of the standard sections that we include in our Shareholder Agreement and why there are considered important:
- Constitution of the company
- Undertakings & Warranties
- Management of the Company and Board
- Pre-emption rights on issue of shares
- Pre-emptions rights on transfer of shares
- Death of a shareholder
- Events of default
- Fair Value
- Drag Along Rights
- Restrictive Covenants
The interpretation section explains the legal terminology used throughout the document, enhancing understanding and removing ambiguity for the parties to the Agreement and any other interested parties.
2. Constitution of the Company
This section refers to the company’s governing document, which is the Constitution. This document is registered on incorporation of the company and includes the company’s by-laws. Any changes to this document must be done by way of a special resolution. The Constitution should not clash with the Shareholder Agreement, however where a dispute arises between both documents, our Shareholder Agreement will prevail.
3. Undertakings & Warranties
This is a declaration from the shareholders that they warrant to comply with the Agreement and undertake to ensure the provisions of same are complied with.
4. Management of the Company and the Board
This section covers how the company is managed, the composition of the board of Directors and how meetings are held. This is important so the parties have a say in how the company is run, even if they own a minority stake in the company.
The deadlock section covers disputes between shareholders where agreements cannot be reached and what resolutions can be made in an effort to end the dispute. It is important for shareholders to know what procedures can be followed in the event of a dispute and if a deadlock occurs.
6. Issue of Shares
This section discusses the conditions attaching to the issue of new shares and includes pre-emptive rights for the existing shareholders. This section offers anti-dilution rights to the other shareholders, ensuring their interests are protected.
7. Transfer of Shares
The transfer of shares section looks at the rights of existing shareholders in a situation where a share transfer is to take place and provides protections so the parties have the right of first refusal.
8. Death of a Shareholder
This section looks at a topic we would prefer to avoid discussing but it is very important where ownership of shares, like any asset, are concerned. This section provides for the procedure to be utilised in the event of the passing of a party to the Agreement. At ShareholderAgremeents.ie we consider this a crucially important clause and that is why we include it as standard in our Shareholder Agreement.
9. Events of Default
Examples of a default include a party to the Agreement declaring bankruptcy or being subject to a Personal Insolvency Arrangement of any kind. This section protects the other parties in this case.
10. Fair Value
This section ensures no parties to the Agreement get an unfair advantage when it comes to selling their shares and provides for an independent valuation of the share price in the case of a sale or transfer of shares. This section is important for fairness.
11. Drag Along Rights
‘Drag along rights’ are included in our standard Shareholder Agreement. These rights allow a majority shareholder of a company to force the remaining minority shareholders sell their shares for the same price, terms and conditions that the majority shareholder has been offered by the buyer. Essentially, the minority shareholders are dragged along into the sale. Conversely, a different clause could be used here called ‘tag along rights’, which give the minority shareholder the option to sell their shares for the same price, terms and conditions as the majority, but unlike drag along rights, they are not obliged to. It is in this case they tag along with the sale of the company. We do not include Tag Along rights in our standard Shareholder Agreement but it can be added as an extra clause.
12. Restrictive Covenants
This section ensures the intellectual property and trade secrets of the company are protected, as well as non-competition clauses and confidentiality. These are crucial items for a modern Shareholder Agreement. Further restrictions can be included in this section for a further fee. Your Shareholder Agreement expert will discuss this with you during the consultation.
This section provides for assigning a benefit in the Agreement to someone else, allowing new parties to the Agreement in future, following a prescribed form.
The notices section provides for how the parties communicate with one another with regards to the Agreement. This is important to keep correspondence consistent.
The final section in the standard Shareholder Agreement is the ‘general’ section which includes items of information to clarify any ambiguity relating to the form of the Shareholder Agreement.
If you require something more specific in your Shareholder Agreement, please let us know and we can agree an additional fee for the work required. We invite you to read our blog on Optional clauses that can be added to your Shareholder Agreement as this may highlight a clause that you may need to consider adding to our standard clauses outlined above.
Please feel free to contact us on 01-2405277 or email email@example.com.