How does a Shareholders Agreement Protect Minority Shareholders?

A minority shareholder is a shareholder who generally holds a much smaller proportion of the company in comparison to other shareholders. As a result, when there are disputes or when difficult decisions need to be made, minority shareholders find that they do not have much strength on their own. If you are a minority shareholder, you must ensure that your rights are protected in the Shareholders Agreement.

Power to Appoint

Shareholders do not run the company, the directors do, which is why it is essential that the directors represent the interests of the shareholders. Shareholders Agreements can outline who can appoint directors, how they are to be appointed and what percentage is required to remove a director. The right to appoint a director gives you control over how the company will be run and provides an assurance to you that there will a director on board who understands your position as a minority shareholder.

Veto Rights

A well-drafted Shareholders Agreement should clearly outline the rights of the shareholders. Sometimes, shareholders can be given 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

This is a right which 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. Having this right means that, as a minority shareholder, you will be given the opportunity to purchase these shares, before they are released to any individual or entity outside of the company.

New Shares

How new shares can be issued is very important – 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 run the risk of your stake in the company being heavily diluted. You may, however, be given preemptive rights, which guarantees you the right to purchase any of the new shares issued, and enables you to protect your percentage of the ownership.

Takeovers

The Shareholders Agreement should set out what happens in the event of a takeover. The agreement can include a clause which states 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.

Key Takeaways

Before you enter into any Shareholders Agreement, you should speak to a business lawyer. If you are a minority shareholder, where decisions are made by the majority of the shareholders, those decisions become binding on you. It is important that your lawyer carefully reviews the agreement and discusses with you; what rights you have under the agreement, how those rights will be protected, and any other concerns which you may have.