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Shareholders agreements are documents that set out the plans and responsibilities of the shareholders. The reason companies draw them up is to prevent disagreements amongst shareholders. Companies are legal persons in their own right, and continue to exist whether the shareholders are around or not.

Which brings us to the reason most companies should have shareholder agreements in the first place – something untoward happens one shareholder, such as death or incapacity, or their circumstances change and they want to exit the business. The problem all shareholders have then is that there may not be any plan to deal with this, and so they are left trying to sort out an agreement, often after they have fallen out in the first place.

What should shareholders agreements contain? This could be best summarised by saying that it should list the rights and obligations of the shareholders in relation to the company. The items that could be covered include:
1. Who is an executive director of the company and what hours and responsibilities do the executive directors have?
2. How many shareholders need to be in agreement for decisions to be made?
3. A formula for issues of new shares needs to be drawn up – any new issue, which does not go in the same proportion to existing shareholders as their current percentages results in a dilution of control of those existing shareholders. This formula may go so far as to determine the value of the new shares to be issued and also how issues are to be resolved where one or more of the shareholders object to issuing new shares – do you want to be able to compel minority shareholders to go along with share issues for example?
4. What happens in the event of a dispute between shareholders, for example where one shareholder is not pulling his weight in relation to his stated duties and responsibilities?
5. What financial information is to be prepared and when and what information is released to shareholders?
6. You may want to insist on life assurance policies payable to the company in the event of death of one of the shareholders. This would then automatically release funds to the company to help in buying back the shares of the deceased shareholder from their spouse or estate.
7. What happens if one of the shareholders who is working in the business becomes unable to work?
You may want to agree how shares are to be valued in the event of the various changes occurring as outlined above.
8. You may want to restrict the limit of authorisation of the shareholders who work in the business so that they cannot commit the company to contracts beyond a certain value.
9. What salaries and dividends are to be paid out?
10. What events other than insolvency will lead to the company being wound up?

There are many other issues that need to be considered but the above is a starting point for most companies.


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