The purpose of a shareholders’ agreement is to provide for how a company is managed and, as far as possible, to prospectively address issues that might otherwise cause issues in the future. A shareholders’ agreement will only bind those persons who are a party to it. Therefore, it is normal practice for all shareholders in the company to be a party to the agreement. A shareholders' agreement should always be read and reviewed in conjunction with a company's articles of association. This is a constitutional document of every company, and among the provisions contained in most standard articles of association are the following; description of share capital; pre-emption rights regarding new issue of shares; provisions concerning the convening and conduct of meetings of shareholders; provisions concerning the convening and conduct of directors’ meetings; powers and duties of directors. It is important that the shareholders’ agreement and the articles of association are drafted in a manner to avoid inconsistencies arising between the two documents.
Matters Worth Noting
A shareholders’ agreement is a private document between the parties thereto which can be made subject to confidentiality restrictions. By contrast the articles of association are a public document available for inspection by members of the public in the Companies Registration Office. This makes the articles of association an unsuitable means for dealing with various sensitive matters.
2. Greater Binding Effect
The articles of association can only bind a shareholder in his capacity as shareholder. By contrast shareholders’ agreements may be used to give rights and impose obligations on shareholders e.g. in their capacity as director.
As explained above articles of association can be amended by way of a special resolution. By contrast, unless a shareholders’ agreement expressly provides for a specific variation mechanism, it can only be varied by unanimous agreement of the parties thereto.
4. Deeds of Adherence
As the agreement only binds the parties thereto it does not automatically bind all shareholders. Therefore, if a party sells/transfers his shares the transferee will not automatically be bound by the terms of the shareholders’ agreement. To get around this a shareholders’ agreement can provide that deed of adherence is put in place which joins the purchaser/transferree as a party to the shareholders’ agreement.
Most shareholders’ agreements will deal with the following areas:
1. Board of Directors
This composition of the board, the rights of shareholders to appoint directors, if any, the manner for calling meetings, the quorum and other similar matters are dealt with.
2. Information Rights
A shareholder who is not a director has limited rights under the Companies Acts to receive information. An agreement will normally include a right to receive information concerning the conduct of the business, for example, monthly/quarterly management accounts; cash flow projections; annual budgets etc.
3. Intellectual Property
It is prudent to provide in a shareholders’ agreement that all such rights which relate to the business of the company (whether developed before or after the date of the shareholders’ agreement) belong to and are to be transferred to the company.
4. Transfer of Shares – pre-emption rights
In private companies it is common to impose an obligation on a shareholder who wishes to sell his shares to give some or all of this co-shareholders an opportunity to purchase them. These are known as “pre-emption rights”.It is also common to provide for certain situations where a shareholder can be compulsorily forced to transfer his shares, including: where an individual shareholder becomes bankrupt; where a corporate shareholder becomes insolvent or has a receiver or an examiner appointed; where a corporate shareholder transfers shares to another member of its group and that transferee ceases to be a member of the group; where an individual shareholder dies; and where an individual shareholder is an employee of the company (or an associated company) and they cease to be employed by that company.
5. Non-Compete Provisions
Shareholders’ agreements normally impose restrictions on the shareholders which restrict them for the period whilst they hold shares in the company and for a period of up to two years thereafter from competing with the businesscarried on by the company;soliciting customers of the company; and soliciting employees of the company.
An agreement should provide for what happens in the event of dispute. It is common for provisions to allow for one party to buy out another, and there may also be provision for a casting vote. Dispute mechanisms may also be set out allowing for mediation and binding arbitration by independent parties.
7. Inconsistencies with the Articles of Association
In order to deal with the possibility that inconsistencies may arise between the articles and the agreement it is normal to include in the shareholders’ agreement a clause which provides that in the event of conflict the provisions of the shareholders’ agreement would prevail. This clause should be drafted to provide that the parties to the shareholders’ agreement that in the event of a conflict between the shareholders’ agreement and the articles of association that they will agree to be bound by the interpretation in the shareholders’ agreement and that they will use their voting powers as shareholders to amend the articles of association to remove the inconsistency.
Augustus Cullen Law have been providing commercial law advices for over 125 years. For any questions or queries in respect to the above, or any commercial matters please do not hesitate to contact Ray Fitzpatrick, David Lavelle, or Barbara Lydon.
19 February 2015