Shareholders’ agreements

A company constitution is (most of the time) a standard document that comes with a newly incorporated company covering topics such as procedures for directors’ meetings, members’ meetings, issuing new shares and transferring existing shares.

A shareholders’ agreement is a more detailed document, usually aimed providing majority shareholders’ additional powers they would not otherwise have under law, or conversely, to provide minority shareholders’ with additional protections they would not otherwise have.

While a custom-made constitution can cover similar topics to a shareholders’ agreement, it is important to remember that a company constitution can be replaced on a 75% vote, where a shareholders’ agreement can only be replaced on agreement of all parties to the shareholders’ agreement. A shareholders’ agreement is therefore more vital to protect minority shareholders.

Shareholders’ agreements usually cover:

1. which shareholders will have the right to appoint a representative director
2. weight of votes (whether each representative director will have one equal vote or whether their vote will be based on the percentage of the shares held by their appointing shareholder)
3. drag along rights (the right of a majority shareholder to force minority shareholders to join in selling their shares to a third party)
4. tag along rights (the right of minority shareholders to elect to join a sale where a majority shareholder is selling its shares to a third party)
5. buy-out mechanisms (such as “Texas shoot-out clauses” or “Russian roulette clauses”)
6. protection of confidential information and intellectual property
7. non-compete and non-solicitation clauses

A buy–sell deed deals with the buyout of a shareholder that suffers a “triggering event” (usually death, total and permanent disability or trauma).

Usually a buy–sell deed will be backed by an insurance policy, whereby the affected shareholder receives a payout in exchange for transferring its shares to the remaining shareholders or the company.