Importance of a Shareholders Agreement

25 Jun Importance of a Shareholders Agreement

What is a Shareholders Agreement?

A shareholders’ agreement is basically an agreement amongst the shareholders of a company. This agreement is meant to govern the relationship between the shareholders of the company.

Following the strict theory of company law, the document that should govern the relationship between the shareholders of a company is – the Articles of Association. However, because of the benefits inherent in having a shareholders agreement, a lot of companies decide to supplement the provisions of the Articles of Association with a shareholders agreement.

The purpose of a shareholders agreement is to protect the shareholders’ investment in the company, to establish a fair and equitable relationship amongst the shareholders and to govern how the company is run.

 

What are the benefits of a Shareholders Agreement?

  • The company’s Articles of Association that form part of the incorporation documents are public documents in Nigeria, which can be accessed by any member of the public and inspected. The shareholders agreement on the other hand is a private contract between the shareholders and as such is governed by the laws of confidentiality between the parties (shareholders).
  • Since the Articles of Association of a company form part of the incorporation documents, the process to amend it is somewhat rigid, and change needs to be communicated to and approved by the Corporate Affairs Commission (CAC). However, for the alteration of a shareholders agreement, the process is fairly straightforward and it can be altered in any way you could alter a regular contract. Therefore altering the shareholders agreement is cheaper, less formal, and therefore more flexible.
  • The shareholders may decide to include in the shareholders agreement, better protection for certain classes of shareholders, which would not ordinarily be afforded to that class of shareholders. For example the agreement can include clauses, which protect the interest of a minority shareholder when the company is making certain decisions.

 

What clauses should a Shareholders Agreement contain?

Some of the important clauses that should be included in a shareholders agreement for a Nigerian company are:

Proposed Nature of the Business – although this will already be contained in the Articles of Association of the company filed with the CAC. It is important that this is also detailed in the shareholders agreement as it forms the basis of what business the company will go into.

Running the company – these clauses will explain how the day-to-day affairs of the company will be carried out, including key issues like the procedure for appointing, removing and paying directors; deciding on what area of business the company should operate in; banking arrangements and financing the company etc.

Issuing and transferring shares – this clause will include provisions on how the current shareholders can transfer their shares, in order to prevent unwanted third parties acquiring shares and how a shareholder can sell shares. It also includes what criteria must exist in order for new shares to be issued.

Minority Protection – this clause would provide some protection to holders of less than 50% of the shares – including requiring certain decisions to be agreed by all shareholders.

Dividends – the clause would set out the requirements for when dividends should be paid, and the percentage of the profits, which should be retained and reinvested into the business.

Competition restrictions – a clause to prevent the shareholders from engaging in businesses that compete with the current business should be included. This is to protect the business and the interest of other shareholders.

Dispute resolution procedures – this the clause that sets out the process for resolving disputes amongst the shareholders. It normally includes things like arbitration, governing law etc. It also includes what process should be followed when there is a deadlock among shareholders with the same number of shares and voting rights.

Capital and financial contributions – it includes clauses which set out what the initial contributions to be made by the shareholders is, and how future capital contributions or financing arrangements are to be made.

Allocation of key roles or responsibilities – if the company is one where the shareholders are also the people who will handle the day to day running of the business, this clause would explain what the respective roles, liabilities, and duties of each shareholder should be and set out any extra compensation which either shareholder might be entitled to as a result of any extra role in the company e.g. a performance based bonus in addition to dividends as a shareholder.

 

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We hope you have found this information helpfulPlease note that this information is provided for general informational purposes only and is not intended to be legal advice. No lawyer-client relationship is formed nor should any such relationship be implied. This answer is not intended to substitute for the advice of a qualified lawyer. If you require legal advice, please consult with a qualified lawyer. If you would like to find out more about a consultation with one of the lawyers in our network regarding a legal issue you are experiencing, you can use the free tool below to get an estimate.

 

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