A Shareholders Agreement forms a legally binding relationship between the shareholders and the company and is usually drafted by a contract lawyer or a business lawyer. The Shareholders Agreement is an extremely important document and needs to set out how the company will be operated, how a shareholder can leave the company, and what obligations each shareholder owes to the company, even after he or she has left. It is important that your Shareholders Agreement covers all of these things, and has robust restraint and confidentiality provisions to protect your company in the event that a shareholder leaves or a director resigns.

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, as it may take several days before each shareholder is able to sign the same agreement. It needs to be clear when the Shareholders Agreement begins because this date also 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 the shareholder is no longer a shareholder. This usually means that the shareholder has sold all of his or her shares in the company.

Restraint

A restraint clause can be included in a Shareholders Agreement to protect the goodwill of the company and 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. Your knowledge and client relationships are valuable to the company and should to be well protected by having a contract lawyer draft these provisions in the Agreement.

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 e.g. your company’s relationship with a supplier; or
  • Assisting any person or entity with any of the aforementioned activities.

Confidentiality

Shareholders will be involved in making important decisions of the business and will have had access to confidential information, including financial records and client lists. It is important that the Shareholders Agreement features a confidentiality clause that clearly sets out what constitutes confidential information and states that confidential information must remain confidential, even after the shareholder ceases to be a shareholder of the company.

Conclusion

The Shareholders Agreement is an essential legal document. Having a well-drafted Shareholders Agreement can help directors and shareholders avoid disputes and can save your company valuable time and money. If you are about to enter into a Shareholders Agreement and have any concerns, you should contact a business solicitor, and discuss your concerns. An experienced business solicitor will be able to review the Shareholders Agreement and provide you with advice as to your rights and obligations as a shareholder and/or director of the company.

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