Shareholders' agreements establish rules governing the relationship between a company's shareholders, but how legally binding are they? What happens if you breach one? Can you terminate a shareholders' agreement?
This article from Howells Solicitors answers some common shareholder agreement questions. Read on to learn more.
Are Shareholders' Agreements Legally Binding?
Yes, a properly executed shareholders' agreement is a legally binding contract between the shareholders. The terms contained within can be enforced in a court just like any other contract. However, shareholders agreements are subject to the Company’s Articles of Association. So, always check which one takes precedence, although this is usually the shareholders agreement.
What Happens If You Breach A Shareholders' Agreement?
Breaching a shareholders’ agreement is a serious matter and can lead to legal consequences.
Typically, the aggrieved shareholders can sue for damages or specific performance of the contract. For example, if you violate a non-compete clause, shareholders may obtain an injunction forcing you to stop the competing business.
They may also sue to recover any financial losses caused as a result of the breach.
How Do I Terminate Or Get Out Of A Shareholders' Agreement?
There are a few options for potentially terminating a shareholders' agreement.
1. You are unlikely to be able to “get out” of a shareholders’ agreement while you still hold any shares. Selling your shares will automatically release you from the terms of the shareholders agreement.
2. All shareholders could consent to terminating the existing agreement.
3. In limited cases, you can ask a court to cancel the agreement, if unfair or illegal terms exist.
These options have challenges, so obtaining early legal advice is crucial before attempting to terminate.
How Do You Protect Yourself In A Shareholders' Agreement?
• Negotiate clear exit provisions for leaving the company under certain conditions.
• Understand the difference between an ordinary resolution (requiring 51% of the votes) and a special resolution (requiring 75% of the votes) is crucial. You need to decide if any of the actions requiring shareholder approval need to be changed to, for instance, make them subject to a unanimous vote.
• Limit supermajority control requirements for key decisions.
• Retain access to essential information through reporting requirements.
• Clarify dispute resolution methods, like arbitration, to avoid court.
• Set rules regarding company valuation and share repurchasing, if you depart.
• Ensure non-compete clauses are reasonable in scope and duration.
• Agree with the other shareholders what should happen to your shares in the event of death or mental incapacity. Consider cross option agreements and life insurance.
We Can Help!
With an experienced solicitor's help, you can craft agreement terms favourable to your interests as a minority or majority shareholder before signing. Don't enter a shareholders' agreement until you fully understand the legal implications. Howells Solicitors can provide guidance tailored to your situation. Get in touch today to discuss or review your shareholders' agreement.
