Articles & Resources
How A Shareholders’ Agreement Can Benefit Your Business
While there is no legal requirement for shareholders to enter into a shareholder agreement, it can be used to ensure that each shareholder’s investment in the company will be dealt with in a fair manner and in accordance with the rules agreed on by the parties ahead of time. It is essentially an owner’s manual that outlines everyone’s roles and how to manage certain unexpected issues when they arise.
Where a new company has a small group of shareholders, it is a requirement that all the shareholders become parties to what is commonly referred to as a Unanimous Shareholder Agreement (USA). This agreement has special legal status in that it can be used to restrict the powers of the directors.
Below are some of the important provisions to have in a USA to allow for shareholders to walk away when a stalemate arrives, or the relationship between shareholders dissipates:
Pre-emptive rights/Right of First Offer
When the corporation decides it wants to issue more shares to raise capital, pre-emptive rights clauses require the company to first offer any newly issued shares to existing shareholders in proportion to the number of shares held by each of them. This is to ensure that the existing shareholders can participate in new share issues without having their shareholdings diluted. This is an effective way for the company to raise capital, as it forces shareholders to invest more money into the business in order to prevent their shares from being diluted.
Third-Party Offer/Right of First Refusal
Where a Shareholder receives an offer from a third party/non-shareholder to purchase their shares, a right of first refusal states that the selling Shareholder must first offer their shares the other shareholders to purchase his shares prior to selling their shares to the third party. A consideration in deciding to include either a right of first refusal clause is: 1) whether the selling Shareholder must first receive an offer from a third party before offering to the other shareholders, or 2) whether the selling Shareholder must first make an offer to the other shareholders before offering to a third party.
Drag-Along and Tag-Along Rights/Piggy-Back Rights
Disputes can arise between shareholders when some wish to sell the company by selling their shares, and some do not. Drag-Along and Tag-Along clauses can help resolve this issue and ensure that a deal can proceed. Drag-Along clauses ensure that if a minimum percentage of shareholders (e.g. 75% or more) wish to sell their shares to a third party; they can force the remaining minority shareholders to sell their shares under the same price and terms. This is to ensure that the third party can receive 100% of the shares and thus the whole company. Conversely, Tag-Along rights require a shareholder selling their shares to include other minority shareholders under the same price and terms. This ensures such minority shareholders are not cut out of the deal.
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