Like a constitution, a Shareholders & Directors Agreement puts in place rules for the governance of a company. The beneficial thing about such an agreement that is different to a formal constitution is that it is not necessarily a public document because there is no legal requirement for the agreement to be registered in any public domain.
A well-drafted Shareholders & Directors Agreement can be vital for a company because it can cover issues such as the following, which often are more detailed and particular than can be achieved through a constitution:
- Directorship – Normally a vote requiring more than 50% of the voting rights is needed to appoint a director. However, a Shareholders & Directors Agreement can provide specific rights to minority shareholders to have a say as a director
- Decision-making – This can cover off questions as to whether all shareholders need to agree to the company taking certain transactions, or whether a majority vote will be sufficient
- Share Dealings – The agreement can provide for pre-emptive rights over shares if one shareholder wishes to sell their shares. It can also prevent shareholders from using their shares a security for their financial purposes
- Strategy – The agreement can put in place a business plan and devise strategies for the future of the company. This can be essential in the early stages of a company to ensure the expectations of the shareholders are the same, and they have been formally documented
- Disputes – A disputes resolution process can be built into the business agreement
- Finance/Capital Raising – The Shareholders & Directors Agreement can also specify the mechanics for how shareholder loans are to be a treated, i.e. whether they bear interest, are repayable on demand, or have security attaching to them. The agreement can also cover off what process the company needs to follow if new finance is required to continue to grow the business.
If you would like assistance with putting in place a Shareholders & Directors Agreement for your company, even if it has been operating for some time, please contact us at Prudentia Law.
While putting an agreement in place for shareholders and directors to refer to as part of the ongoing management and governance of the business, it is also important for a company to consider how it can minimise the risk associated with the different parties involved.
If a shareholder was to pass away and there was no mechanism for how the remaining shareholders are to manage the necessary changes that would be forced on the company, the business can suddenly fall into a negative spiral while larger issues are being resolved.
It is sensible that the parties consider what protection should be in place for circumstances where a party prematurely exits the structure. One of the simplest mechanisms can be to put in place a buy-sell arrangement in the Shareholders & Directors Agreement that includes the requirement to have insurance in place to enable the remaining shareholders to buy out a deceased shareholder’s estate.
It is also sensible to have key-person insurance if one or more of the directors/shareholders is a key to the ongoing sustainability of the business. Key-person insurance can then be used to hopefully find a replacement and remunerate that replacement, rather than having the company with no plan for replacement of the vital person.
While Prudentia Law does not provide specific insurance advice in regards to products available, we can provide referrals to insurance professionals who deal in this area, and we can prepare the necessary documents to fit around the insurance products you may decide to incorporate into your company.