I am often asked to review shareholders agreements between existing shareholders and shareholders wishing to purchase a business. A question often asked is what voting rights they have.
The shareholder entering the business may reach a handshake agreement with the other shareholders to have a say in the general running and strategic direction of the business, without the responsibilities of being a director.
When the time comes to sign the shareholders agreement, the powers the shareholder thought they were to receive are nowhere to be found in the shareholders agreement.
Accordingly, if you are considering becoming a shareholder in an existing or new company and wish to protect your rights, it is important that you ask yourself the following questions:
- What types of issues can the following parties vote on:
(a) The Chairman;
(b) The board of Directors;
(c) The Shareholders.
- Who are the parties that make up the board of Directors, and how are the Directors appointed?
- Which of the parties mentioned in item 1 will get a casting or deciding vote if there is a deadlock between the parties?
- Whether you will have the same personal liability as other shareholders if the business is called upon to fulfill any future financial obligations.
A shareholders agreement tailored to your specific circumstances can assist the parties with:
- Knowing their full rights and obligations about voting rights before entering into a transaction;
- Knowing which issues they can vote on and what will happen if there is a deadlock or dispute between the parties;
- Knowing the types of resolutions for different decisions (ie unanimous special resolutions or ordinary resolutions);
- Ensuring that any disputes or deadlocks are resolved quickly and with minimal interruption to the day to day running of the business.
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