The Sunday Mail
This articles is introductory, simplified and not exhaustive.
In very simple terms a shareholders’ agreement is an agreement entered into by shareholders in a company. It regulates the relationship of shareholders in the company.
Shareholders are advised to enter into such an agreement especially at the formation of a company. Where there are subsequent changes an addendum may be added.
If there are material changes a new shareholders’ agreement may be entered into.
What a shareholders agreement covers?
A shareholders agreement covers some of the following aspects:
Names of the shareholders
Number of shares held by each shareholder
Percentage shareholding by each shareholder
Date of the agreement
Allotment of new shares
Restrictions on transfer of shares
Protection of minority shareholders
Protection against dilution
Pre-emptive rights or right of first refusal for current shareholders
Appointment of directors
Involvement of shareholders on the board of directors or management of the company
Powers and limitations of the board of directors
Rights of access to information
Dispute resolution mechanism such as mediation, arbitration, litigation.
Dividend and dividend policies
Loans by shareholders
Disputes by shareholders
Disputes by shareholders in a company are common. At times this is due the absence of such agreements, difference in interpreting the agreements or simple disregard of the agreement by some shareholders. Some of the areas at the centre of disputes include the following:
Number and percentage of shareholding held. This is quite common. This is particularly so if there were changes to the original shareholding but the changes are either not documented or finalised. This is common where shareholders are known to and trust each other such as are friends or relatives
Treatment of allotted shares that have not been fully paid for.
Where a shareholder has failed to bring in what he / she was expected, for example, technical expertise, customers, equipment, and so on.
Where one or more shareholders are believed to be having overarching influence on the board and management.
Where shareholders involved in the management of the company are suspected of acting against the interests of the company or the other shareholders.
Resolving shareholding disputes
Unresolved shareholding disputes normally manifest themselves through:
A divided board of directors i.e. a factional board where resolutions are either blocked or disregarded.
Divided management i.e. factional management.
Disregard by management of board resolutions.
Where a business is owner managed, unilateral actions by some owner managers.
Leaking of company information to outsiders.
Use of outsiders to settle internal disputes.
A good agreement should provide for dispute resolution mechanisms such as mediation, arbitration or litigation.
Difference between a shareholders agreement and Articles of Association
The Articles of Association is a statutory document that is prepared and filed with the Registrar of Companies at the formation of the company. It is filed together with other documents such as the Memorandum of Association, record of directors (CR14), registered office (CR6) and so on. The Articles is a public document. It, however, spells out the internal governance of the company. No doubt the Articles speaks to the shareholders agreement.
On the other hand, a shareholders agreement (“the Agreement”) is a private document entered into by the shareholders to cover the issues enunciated above.
It is very specific especially on the identity of the shareholders, their shareholding, and other issues.
An investor is advised to approach his / her legal practitioner for assistance with a shareholders’ agreement. Company secretaries and board of directors may also have an interest in this document.
◆ Godknows Hofisi is a lawyer, Chartered Accountant and business rescue practitioner. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]