A shareholders’ agreement forms a legally binding relationship between the shareholders and the company. It is an extremely important document that sets out how the company will be operated. Furthermore, it illustrates how a shareholder can leave the company, and their obligations, even after leaving. This article will outline the key areas you should include when drafting a shareholders’ agreement and the benefits of drafting one.
Commencement
Normally a shareholders’ agreement takes effect on the date that it is signed by the last shareholder. There is often no set date if there are many shareholders. Generally, it may take several days before each shareholder can sign the same agreement. It must be clear when the shareholders’ agreement begins because this date indicates when all the obligations within the agreement commence.
Termination
The shareholders’ agreement can be terminated either by agreement of all the shareholders or, in respect of a particular shareholder, when that individual is no longer a shareholder. This usually means that the shareholder has sold all of his or her shares in the company.
Continue reading this article below the formRestraint
You may include a restraint clause in a shareholders agreement to protect the goodwill of the company. This is also to prevent employees, partners, shareholders or directors who leave the company from:
- competing with the business;
- taking clients; or
- otherwise benefiting from the company’s knowledge and experience.
A standard restraint clause generally prevents a shareholder, during the term of the agreement and for a set period after termination, from:
- competing with your company by setting up or being involved in a similar company;
- poaching any of your employees or your clients;
- interfering with any important contractual relationships, such as your company’s relationship with a supplier; or
- assisting any person or entity with any of the aforementioned activities.
When considering the restraint clause, some questions include how broad the restraint should be and the timeframe it should cover.
Confidentiality
The shareholders’ agreement must feature a confidentiality clause that sets out what constitutes confidential information and states that such information must remain confidential, even after the shareholder ceases to be a shareholder of the company.
Benefits of a Shareholders’ Agreement
The shareholders’ agreement is valuable as it establishes the rules between the shareholders and the company, especially in the event of a conflict or when a shareholder leaves. Drafting a robust shareholders’ agreement enables the shareholders and the company to agree on important processes early on. For example, this may include agreeing to a dispute resolution process.
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Key Takeaways
The shareholders’ agreement is an essential legal document. A well-drafted agreement can save your company valuable time and money, especially in avoiding disputes between directors and shareholders. It is important to draft the shareholders’ agreement with robust commencement, termination, confidentiality and restraint provisions.
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Frequently Asked Questions
A shareholders’ agreement should have commencement, termination, confidentiality and restraint provisions.
A restraint clause generally prevents a shareholder from competing with the business, taking clients or benefitting from the company’s knowledge and experience. This is normally for the term of the agreement and after the shareholder leaves the business for a set period of time.
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