Being the owner of a company you want to ensure that you protect your interests as best as possible. A shareholder agreement is without doubt the most significant legal document you will have to deal with in order to regulate the relationship between the shareholders. This aim of this article is to point out some of the most relevant clauses you will need in such an agreement.

While this agreement governs the relationship between the shareholders of a company, it also tells the company shareholder and directors what they can and can’t do. For example, in a startup type of situation, you can clearly set out what the shareholders can and cannot do, such as, limit the amount of borrowing they can obtain or set the capital injection required. Some of the relevant clauses include:-

Operation of the business – One of the first clauses in a shareholders agreement sets out how the business will be operated.

Directors and their duties – One of the most important clauses to review is the one relating to directors and their duties. It would be common practice for each shareholder holding a certain percentage of shares in the company to appoint one or more directors. This information must be provided clearly in the shareholders’ agreement. The duties of the directors should also be clearly set out.

Board meeting- It’s important that the company has a formal process for running board meetings, who can be called and the percentage of shareholders (on a holdings basis) necessary to create a quorum.

Shareholder contributions and share split – the agreement needs to set out the share split of the total shares in the company. There are many ways businesses choose to allocate shares. The total shareholding needs to be set out clearly, usually in a schedule to the agreement, so it can be easily amended if you bring on board other investors in the future or certain shareholders exit from their holding.

Selling Shares (Right of first refusal, tag along, drag along) – clauses that many businesses choose to include in the agreement include right of first refusal, tag along and drag along clauses.

• A right of first refusal clause essentially gives each of the shareholders the right to purchase shares owned by another shareholder who wants to exit. If an outside party offers, for instance, €1 euro per  share, then the existing shareholders has the right to purchase the shares at that price before the outside investor gets the opportunity to do so.
• Tag along clauses – these types of clauses are designed to protect minority shareholders in the event that a majority shareholder decides to exit and sell his/her shares. The minority shareholders will have a right to be bought out, on a pro rata basis, along with the majority shareholder.
• Drag along clauses – these clauses allows a majority shareholder to “drag along” a reluctant minority shareholder in the event of selling the business onto a third party.

Deadlock clauses – disputes can and do arise. A deadlock clause can provide for mediation, arbitration or expert resolution of the issue. Failing that, termination of the company is the final option.

It is really important to have a good idea of what the main clauses in a shareholders agreement are and where possible, to have a real understanding of what you want from such an agreement before meeting with a solicitor. Not only will this save in time, but it will ultimately save you money!

For further information on shareholder agreements contact us at roisin@rocs.ie

This article is general in nature and cannot be regarded as legal advice. It is general commentary only. You should not rely on the contents of this article without consulting one of our Solicitors. If you would like advice regarding how the law applies to your individual circumstances, then please contact Roisin O’Connell Solicitors.