Shareholders Agreement
Shareholders Agreement
In this issue, we discuss company law and the common issues that arise when operating a business in corporate form.
Many of us know friends who have gone into business as partners. At the start, everyone is amiable and enthusiastic, obstacles seem nonexistent, and wealth seems just around the corner. But harsh reality is that disputes and disagreements—often unanticipated at the outset—are almost inevitable.
You may ask: What kinds of disputes? What problems? Let’s use an example. Suppose a company has five shareholders: who will serve as director? If the company’s finances falter, who will inject additional capital? Each partner has different strengths—who handles which responsibilities? If one partner wishes to exit later, what happens to their shares? And so on.
Regardless of size or industry, you’ve likely heard of partners falling out over these very questions. When initial terms aren’t agreed upon, conflicts abound.
To regulate shareholders’ rights and obligations at a company’s formation—and to provide mechanisms for resolving disputes—the “shareholders agreement” was created.
As its name implies, a shareholders agreement is a special contract among the company’s shareholders. It supplements the company’s constitution by clearly defining each shareholder’s rights, duties, and responsibilities in areas the constitution may not cover.
The agreement can address a wide range of topics. Any matter not detailed in company law or the constitution can be managed under a shareholders agreement.
Ideally, shareholders should execute this agreement during their “honeymoon” phase and use it as their guiding rulebook.
Common provisions include, but are not limited to:
1. Mechanisms for shareholder admission and exit;
2. Appointment and retirement/ removal of directors;
3. Frequency of company meetings and procedures for major decisions;
4. Directors’ duties and performance expectations;
5. Dividend distribution and management of director withdrawals;
6. Capital injection mechanisms when finances are tight;
7. Restrictive covenants for former members;
8. Dispute resolution procedures (mediation, etc.);
9. Contingency plans for a director/shareholder’s death or incapacity;
10. Company winding-up procedures.
Every business and group of shareholders is unique, so additional bespoke clauses may be required.
A shareholders agreement is a complex legal document. Shareholders should first agree on key terms privately, then engage a lawyer to draft the agreement. A professionally drafted agreement will best safeguard the company’s operations.
See you next issue.
Editor’s Note:
Mr Ren is originally from Guangzhou, China and has practised for many years. He is now the Principal Lawyer at LJR Legal.
Embracing modern technology, speaking the languages of our Chinese community, and serving as your dedicated legal advisor has been Mr Ren’s mission throughout his career.
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Disclaimer: This column provides general legal discussion only. The text, images, and any content herein do not constitute legal advice, nor does Mr Ren intend by this column to advise its readers. If you require advice tailored to your circumstances, please arrange a confidential one-on-one consultation with Mr Ren. Neither this column, the magazine, nor Mr Ren accepts liability for any loss arising from anyone’s use of its content.