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Going Into Business


Going Into Business

Shareholders Agreements- Protecting Your Interests

  1. Shareholders Agreement- Conflict of Interests

    If you are going into business with others, you need to make sure you get a fair return for your efforts, so a shareholders’ agreement between all existing shareholders of your limited company is advisable. Any new shareholder should adhere to the provisions of the shareholders agreement by entering into a Deed of Adherence.

    One of the issues which regularly crops up in this area is the question of conflict of interest. Your interests might be in direct conflict with the interests of each of the other shareholders. Each shareholder shall retain his/her own legal advisers.

  2. Shareholders Agreement- Issues to be Covered

  3. (a) The composition of the board

    • How many directors are on the board at present?

    • Who has the right to appoint a director?

    • Is there to be a minimum shareholding requirement to maintain a board representation? For example if you are to sell some of your shares keeping only 5% of the entire share capital should you still be entitled to nominate a director to the board?

    (b) Approval of Business Plan

    • Is there a Business Plan in existence?

    • How is it approved at present?

    (c) Distribution policy

    • How much money will be paid to the shareholders as dividends?

    • Does the company have such distribution policy at present?

    (d) Transferability of shares in different circumstances

    • Will the shareholders have the right to sell to third party purchaser?

    • Will each of the shareholders has the right of first refusal in the event of sale by another shareholders to third party purchaser?

    • Will certain transfers by the shareholders be allowed without consent of the other shareholders, for example, to the members of the transferring shareholder’s family or affiliate companies/trusts?

    • What happens to shares if someone leaves (whether on good or bad terms)? Include ‘good leaver/bad leaver’ provisions which regulate these circumstances.

    (e) Deadlock and termination

    Deadlock may arise if, for example, any of the shareholders/directors refuse to attend two or three consecutive shareholders/board meetings so it becomes impossible to continue company’s business.

    • What is the process for resolving a deadlock?

    • What happens to the absent shareholder’s shares?

    (f) Obligatory transfer events- this provision is important if, for example, any of the shareholders becomes a bankrupt or attempts to transfer the shares otherwise than in accordance with the shareholders agreement.

    (g). Drag along right- the right allowing a shareholder to force other shareholders to sell their shares to a third party purchaser at the time he sells.

    (h). Tag along right- the right allowing the non-seller shareholders to join the sale by the seller shareholder to third party purchaser at the time he sells.

    (I). Minority protection- this include, amongst others, the right of veto on certain matters, also known as "reserved matters". Commonly reserved matters will cover, amongst other things:

    • approval of the business plan;

    • borrowings over a certain limit;

    • appointing/removing auditors;

    • amending memorandum and articles of association;

    • acquisitions and disposals of material assets;

    • encumbrance of material assets;

    • provision of guarantees.

    How the above matters are dealt with at present?

    (j). Restrictive covenants- limitations placed on leaving/transferring shareholders in respect of their future business activities which might be in competition with the company’s business.

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