What is a Shareholders’ Agreement?

A shareholder’s agreement is a binding contract that sets out the shareholders rights and obligations in the company. During registration, the members pay funds in respect to the shares allotted to them at par value. The amount paid up in respect of the par value of shares represents a company’s paid-up share capital.

A well-drafted shareholders’ agreement safeguards the company’s future and offers shareholders protection against unforeseen circumstances that may occur as a result of a change of ownership within the company. The document provides clear guidance on decision-making procedures/requirements and reduces the negative impact of unwarranted interference in the company’s management.

Essentially, the agreement:

  • Sets out effective governance structures and secures the shareholders’ interests;
  • Stipulates the shareholders’ rights and obligations by protecting their investments in the company;
  • Regulates the sale/transfer of shares and rights of disposal of shares in the company;
  • Describe the decision-making criteria and requirements within the company;
  • Provide protection for minority shareholders in terms of capital and financial contribution rights in the company;

Components of a Share Agreement

  1. Board of Directors – A shareholders’ agreement needs to set out the composition, appointment, the term of the board of directors.
  2. The class of shares held within the company and the rights attached to those shares. This shall inform the shareholders’ decision making criteria and process.
  3. Proceedings of shareholders- This outlines the manner and frequency of general meetings and deliberations that shall ensue during such meetings.
  4. Sale/Transfer of shares- This outlines the regulations put in place with respect to the shareholder’s rights to dispose of their stake.
  5. Dispute resolution- This clearly set the rules/guideline on how to resolve disputes within the company, and what actions are to be taken where shareholders cannot agree on the running of the company.
  6. Accounting, audit and information rights which stipulate the shareholders right to access the company’s financial information.
  7. Minority Shareholder Protection – A well-drafted and carefully considered shareholders’ agreement will not only protect majority interests but also that of the minority this promotes trust among all the shareholders.
  8. Termination of shareholding- The agreement should clearly outline well-illustrated procedures, notices and grounds for termination of shareholding in the company.

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