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How Does a Shareholders Agreement Protect Minority Shareholders?

A minority shareholder is a shareholder who holds a smaller proportion of the company in comparison to other shareholders. When there are disputes or difficult decisions arise, minority shareholders find they do not have much strength on their own. If you are a minority shareholder, you must ensure your rights are protected in the Shareholders Agreement. This article explores how a shareholders agreement can protect the rights and interests of minority shareholders.

What is a Shareholders Agreement?

A shareholders agreement is a legally binding contract between the shareholders and the company. It outlines the rights, obligations, and protections of shareholders and governs their relationship with one another and with the company. While not all companies have a shareholders agreement, it is highly recommended, especially when multiple shareholders are involved.

Power to Appoint

Shareholders do not run the company – the directors do. Accordingly, it is essential that directors represent the interests of the shareholders. A shareholders agreement can outline the following:

  • who can appoint directors;
  • the process of appointing directors;
  • the percentage required to remove a director. 

The right to appoint a director gives shareholders control over how the company will be run. This right also assures you that there will be a director who understands your position as a minority shareholder.

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Veto Rights

A well-drafted shareholders agreement should clearly outline the rights of the shareholders. Sometimes, shareholders can receive veto rights in relation to certain matters including, but not limited to:

  • remuneration of directors;
  • borrowing levels;
  • commencement of legal proceedings; or 
  • issuing new shares.

Right of First Refusal

Preemptive rights, also known as the right of first refusal, allow existing shareholders to purchase additional shares before they are offered to outside investors. This right requires any existing shareholder who wishes to sell their shares to first offer it to other existing shareholders on a pro-rata basis to maintain percentage ownership. 

These rights are particularly valuable for minority shareholders, allowing them to maintain their ownership percentage and prevent dilution. Having this right means that, as a minority shareholder, you can purchase these shares before the company releases them to an outside individual or entity.

A shareholders agreement can include provisions that grant preemptive rights to all shareholders, including minority shareholders.

New Shares

How a company can issue new shares is very important. Namely, does it require unanimous approval or only majority approval? 

If it requires unanimous approval, that gives you the right to object to the issuing of new shares. If only majority approval is needed, then as a minority shareholder, you risk your stake in the company from further dilution. However, you may receive preemptive rights. These guarantee you the right to purchase any of the new shares on issue, protecting your percentage of the ownership.

Access to Information

Transparency is vital for minority shareholders to monitor the company’s activities and protect their interests. A well-drafted shareholders agreement can ensure that minority shareholders can access certain information, such as financial statements, annual reports, and board meeting minutes. This access allows them to stay informed about the company’s performance and decision-making processes.

Exit Events or Takeovers 

Sometimes, minority shareholders may wish to exit their investments and sell their shares. A shareholders agreement can outline procedures for the sale of shares, including provisions for rights of first refusal, explored above, or drag-along rights. Drag-along rights allow majority shareholders to require minority shareholders to sell their shares along with them in the event of a sale of the company, ensuring that minority shareholders are not left behind or disadvantaged.

The shareholders agreement should set out what happens in the event of a takeover. The agreement can include a clause stating that in the event of a takeover offer, and the majority of shareholders want to sell their shares, as a minority shareholder, you will be able to “tag along” and sell your shares at the same price.

It is important to note that a shareholders agreement is a private contract, meaning its provisions may vary from one company to another. A company can tailor specific protections for its minority shareholders according to the unique circumstances and needs of the company and its shareholders.

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Key Takeaways

A shareholders agreement is a powerful tool that can protect the rights and interests of minority shareholders. By addressing concerns such as voting rights, preemptive rights, unfair treatment, access to information, and exit strategies, a well-drafted shareholders agreement ensures that minority shareholders have a voice, are treated fairly, and can make informed decisions about their investments. If you are a minority shareholder, it is essential to understand the terms of the shareholders agreement and seek legal advice if needed. Ultimately, a shareholders agreement can play a significant role in safeguarding your position within the company.

For assistance understanding your rights under a shareholders agreement, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

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Brinley Meagher

Brinley Meagher

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