When setting up a company, whether it be with family, friends, strangers or business acquaintances, it is all to often assumed that nothing will go wrong in the future of the company, you are all great friends now, everything is on amicable terms, and it appears set to remain hunky dory for the foreseeable future. Unfortunately, most businesses that fail due to a fall out between shareholders start out like this.
Hopefully, touch wood, nothing like this will happen to your company. However, in order to avoid costly litigation and disputes further down the line, Shareholders Agreements, along with the other foundation documents of the company, act as a safeguard in instances of potential fallouts.
FAQ's regarding Shareholders Agreements:
Once you have checked out and purchased the custom Shareholders Agreement service, we’ll get in contact with you, and analyse the needs specific to your company in order that we may draft a custom fitted Shareholders Agreement for it.
The drafting is normally done by us within 1 week, and you will also have the chance to review the draft and have two free rounds of amendments made to the Shareholders Agreement if necessary.
As you might have guessed, a Shareholders Agreement is an agreement between the Shareholders, whether all of them, or some of them, which serves to set out how the company should be governed, protects the interests and investments of the shareholders, and sets out to establish a fair relationship between the shareholders themselves.
- Sets out the rights and obligations of the shareholders’;
- The initial contributions required of the shareholders;
- Proposed nature of the business;
- Future financial arrangements of the company;
- Key roles and responsibilities of the shareholders;
- Regulates the ownership and voting rights of the shares in the company;
- Describes how the company should be controlled and managed;
- Specifies the methods which govern the sale of any shares in the company;
- Sets out any protection which may apply to minority shareholders;
- Sets out how future disputes between shareholders should resolved;
- Protects competitive interests of the company, such as prohibiting the shareholders to partake in competing businesses, or poaching staff members.
Under the 1973 Companies Act, the provisions of a company’s Shareholders Agreement could override the constitutional documents of the company. Since the 2008 Companies Act, this position has changed, as the new Act provides that the company’s Memorandum of Incorporation (The primary constitutional document of the company) will override a company’s Shareholders Agreement to the extent that the Shareholders Agreement conflicts or contradicts the Memorandum of Incorporation, effectively making the Memorandum of Incorporation the most essential governing document of the company.
A standard Memorandum of Incorporation is issued when a company is registered, while a Shareholders Agreement is an optional document.
Why then would you want both a Shareholders Agreement and a Memorandum of Incorporation?:
- A company’s Memorandum of Incorporation is available for public inspection, whereas the terms of a Shareholders Agreement, as a private contract, are confidential between the parties;
- Shareholders Agreements are cheaper and less formal to form, administer, revise or terminate, as, in most instances, notices, resolutions and amended provisions of a Memorandum of Incorporation need to be filed with the CIPC whenever an amendment or revision is made; and
- A Shareholders Agreement provides for greater flexibility, as the shareholders may anticipate that the company’s business requires regular changes to their arrangements, and it may be unwieldy to repeatedly amend the Memorandum of Incorporation.