Apart from the normal paragraphs that most contracts share (such as Definitions, Interpretation etc.) Shareholders’ Agreements usually have the following clauses –
These clauses deal with shareholders’ loan accounts, when they will arise, their proportions, interest (normally a few points below prime), and repayment.
These clauses prohibit a shareholder from using his shares as collateral to secure a liability. They also deal with the circumstances and formalities relating to the establishment of any guarantees by or on behalf of the company.
These clauses determine the rights of each the shareholders to appoint directors, how the mecahnism works and whether the directors may appoint alternates.
Although the declaration of dividends is the responsibility of the company’s Directors, as they are, in the case of entrepreneurial businesses, usually the same people as the shareholders, the agreement often sets out the dividend policy. Often these policies are too prescriptive (e.g. stating exactly what percentage of after tax profits will be distributed), especially when the agreement is drafted by someone with little commercial experience. However, a statement of intent can be useful as long as the Directors are left with discretion.
Sale of shares
It is important to distinguish between voluntary sales and forced sales (such as arising from death, disability, retirement, failure to perform etc.)
For voluntary sales, the price is negotiated between the seller and buyer(s).
For forced sales, we like to have a clear formula for the valuation (e.g. the Net Asset Value per tha last Audited Financial Statements, or four times the Net Profit after Tax per tha last Audited Financial Statements or something like that). This gives certainty under what are probably stressful circumstances.
This defines the circumstances under which a shareholder may voluntarily sell his shares and gives the other shareholders the right to buy them. The matter is dealt with in the Memorandum of Incorporation of the company, so this clause only needs to deal with additional rights.
If a majority shareholder receives an offer from a third party to buy the entire shareholding of the company and a minority shareholder does not exercise his pre-emptive right to buy the majority shareholder’s shares, then the minority shareholder is forced to sell his shares to the buyer on the same terms and conditions that he buys the majority shares.
If a majority shareholder receives an offer from a third party to buy his shares and a minority shareholder does not exercise his pre-emptive right to buy the majority shareholder’s shares, then the minority shareholder can insist that the buyer buys his shares on the same terms and conditions that he buys the majority shares.
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