The shareholders should ensure that the agreement takes care of the key clauses as identified but most importantly, the agreement should be defined by:
λ Interests of shareholders
λ Shareholder value
λ Voting powers
Monitoring shareholders’ agreements
Decision making may be reserved for shareholders themselves and/or delegated to Directors.
Monitoring and evaluation may be done by each party through its legal representatives and/or consultants and reviewed at shareholders meetings of the joint venture, franchise, partnership and/or agency.
Several agreements may be required to support the main shareholders’ agreement, and these are dependent on relevance to circumstances of the project.
The following operating agreements are common:
λ financing agreement – to give details of how project is financed
λ management services – to identify party offering the services, usually the most active and/or outsourced firm
λ Intellectual Property Licensing and Royalties Agreement- to protect rights of parties with regards to existing and new intellectual property
λ Employment and Restraint Agreement – to limit parties from engaging directly or indirectly in similar projects for a specified period and/or in a territory.
Enforcement and Remedies upon breach
A shareholders’ agreement is legally binding and in case of a dispute or breach shareholders rights are protected.
It is therefore an enforceable contract and contract law applies regarding enforceability and remedies.
The best time to bring a shareholders’ agreement into perspective is at the beginning of a relationship and it doesn’t matter whether shareholders are entities or individuals.
It becomes imperative to have a shareholders’ agreement if there is more than one shareholder.
Where no agreement exists at the beginning of a business relationship and parties run into challenges, experts may be engaged to review an existing relationship and create an all-encompassing shareholders agreement to the benefit of all concerned.
Buy and Sell Provisions
A shareholders’ agreement should consider possibilities or events that are likely to happen in future.
Anything that may alter the status quo at the start of the joint venture and/or partnership needs attention at drafting stage.
The buying and selling of shares clause should address the following:
λ Triggers for purchase or sell – consider issues such as death, share-buy back options (redemption)
λ Share prices – a valuation procedure should be in place to determine share prices upon purchase and/or sell.
λ Investor rights – consider right of first refusal, prohibitions to transfer and related matters
Signing Shareholder Agreements
Having a shareholder agreement in place especially for new projects or ventures is a positive step and signing it should not be an event but a process.
As a party to a shareholder agreement, one should understand and appreciate the whole document including the small print.
Seeking legal counsel and/or expert advice before signing off helps one to fully understand limitations or restrictive clauses which may be relevant in future.
Reserved Matters
The issue of delegating authority to board of directors helps getting projects running with the speed required of any business venture.
Shareholders agreements may reserve certain matters for shareholders determination.
Such issues may include but not limited to the following:
λ Winding up of project or venture.
λ Repayment of capital or assets to members
λ Change of name, registered office, bank accounts, auditors and accounting period of the company.
λ Conclusion of contracts outside the ordinary course of business
λ Amendment to business plan
λ Incorporation and/or acquisition of affiliate companies.
λ Transfer or change of rights attached to any class of shares
λ The approval of annual operating and capital budgets
Fungai Chimwamurombe is a registered legal practitioner and Senior Partner at Zenas Legal Practice and can be contacted for feedback at fungai@ zenaslegalpractice.com and WhatsApp 0772 997 889.
Bhekimpilo Mangena is a Business Consultant at Zenas Consulting (Pvt) Ltd and can be contacted on 0712500490.
