SHAREHOLDER AGREEMENT

Shareholder agreements vary from business to business. They are very fact specific and should be tailored to suit the requirements and aspects of that business.

Much depends on the nature of the business; the class of shares; and many other factors but there are certain basic components that every shareholder agreement should contain. Examples would include the number of shares to be issued and how shareholders can sell or transfer their shares to third parties. A shareholder agreement should also cover matters such as dividend payments; distribution of earnings; the frequency of board meetings and the appointment or resignation of directors.

The agreement should provide sufficient safeguards for certain events, such as if a shareholder is made bankrupt or dies, and a good shareholder agreement will also provide for instances where a shareholder resigns or sells their shares in the company. In such cases the agreement should include restrictive covenants and provisions for good leavers and bad leavers. Restrictive covenants would prevent a shareholder from competing with the company for a specified period in the future. Whilst good leaver/ bad leaver provisions would limit the value of a departing shareholder’s shares in certain circumstances.

The shareholder agreement and the company’s articles of association will normally dictate the best way to resolve a dispute. You should obtain legal advice as early as possible to help minimize the impact of the dispute and ensure that you are aware of your rights and options. Where possible, it is advisable to try and resolve the dispute by negotiation or some agreed form of alternative dispute resolution (ADR). Our specialist dispute resolution solicitors can guide you through the process, working with you to find the right solution for you and your business. We can assist with:

• Unfair prejudice petitions.
• Derivative claims.
• Just and equitable winding up proceedings.

Much like any other contract, a shareholder’s agreement is legally binding. Therefore, in most cases the standard rules of contract law will apply regarding enforceability and the remedies available if a breach of that agreement or a dispute occurs.

Ultimately a shareholder’s agreement is a legally enforceable contract so where there is a failure of the obligations within a shareholder’s agreement, the wronged party can claim for breach of contract, enforcing the terms of the agreement.

If you are concerned about the actions of a director or another shareholder or worried your rights are being disregarded, there are several actions you can take. The nature of the dispute or the impact of the breach will be unique to each case, but typically consequences would include:

• Termination of the shareholders’ agreement or termination of employment.
• The innocent party could seek damages for loss suffered because of the breach.
• The court may order specific performance of the contract or of the provision breached.
• The innocent party may seek an injunction to prevent a threatened breach.
• Court ordered injunction requiring the offending shareholder to take an action such as transferring their shares.