By Brendan Ringrose, Solicitor, Whitney Moore. 10th May 2013.
Updated 16th February 2017.
A shareholders’ agreement is a legal contract between the shareholders (also called members) whose purpose is to govern the rights and obligations of the shareholders. It also establishes a framework for the operation and management of the company, thereby providing greater certainty for the parties involved.
Many new companies will adopt the standard articles of association under the Companies Acts 2014 and a shareholders’ agreement is useful way to deal with situations that are not covered by the articles. However, one important difference between these documents is that a shareholder’s agreement remains confidential whereas the articles of association become publicly available once they have been filed with the Companies Registration Office.
Company law affords relatively few rights for shareholders with the result that a shareholders’ agreement can be used to confer additional rights and powers on shareholders, in particular, minority shareholders, related to the transfer of shares including drag-along rights and tag-along rights, rights of veto and corporate governance matters.
Transfer of Shares
Restrictions on the transferability of shares, for example rights of first refusal and compulsory transfers by shareholders in particular circumstances, can supplement a shareholder’s rights. This allows shareholders to restrict the free disposal of shareholdings in order to avoid a situation where they could find themselves co-shareholders with an incompatible party.
‘Drag along’ and ‘tag along’ rights come into operation when a prospective purchaser offers to purchase the company’s shares. ‘Drag along’ rights favour the majority shareholders and apply where a majority of shareholders wish to sell their shares to an outside purchaser, they can compel the other shareholders to participate in a sale of the shares on the same terms. ‘Tag’ rights favour the minority shareholder and refer to a situation whereby a minority shareholder can ‘tag along’ on the same terms if the majority shareholders wish to sell their shares.
Another important protection in such agreements is veto rights on certain business decisions. It is possible to give minority shareholders this right by providing that certain specified decisions, e.g. borrowing or changing the nature of the business, cannot be undertaken without the consent of a specified shareholder, thus protecting that shareholder’s position.
On the matter of corporate governance, one important protection for the minority shareholder is the power to appoint a director to the board of directors. Shareholders’ agreements usually state that regular board meetings should be held and provide for reasonable notice to be given to directors. Additional information rights can be granted, such as the right to receive business plans or management accounts from the board.
Deadlock can arise where the board cannot reach a decision on a matter. The shareholders’ agreement should anticipate this scenario by providing that any management disagreements which result in deadlock be resolved by way of mediation and/or arbitration thereby avoiding the cost and delay of litigation.
It is for these reasons that a shareholders’ agreement is an essential and worthwhile investment for all companies with more than one shareholder, particularly for those looking to register a new company in Ireland. It is advisable in the early stages of a business relationship to anticipate and reach legal certainty on how to deal with any issues which may arise in the future. A bespoke shareholders’ agreement should be carefully drafted based on appropriate legal advice. Whilst many of these provisions seem straightforward, the importance of drafting a formal agreement specifically tailored to the company and its shareholders’ needs cannot be overstated.
Brendan Ringrose (Brendan.firstname.lastname@example.org) is a Corporate Solicitor in WhitneyMoore Solicitors, Dublin 2 and advises on all aspects of shareholders agreements, share sale agreements and related legal issues.
WhitneyMoore Solicitors, Wilton Park House, Wilton Place, Dublin 2. Telephone 01 6110000.Contact us now for further details