Checklist Description
This checklist outlines the nature of stockholders’ agreements and their structure.
Definition
The shares (or stock) issued by most limited companies are classed as “ordinary,” and each share carries one vote. Majority shareholders will therefore control voting in the company. Since minority shareholders may resent not having any say in important company decisions, conflicts can arise. To minimize these, it is advisable that the shareholders sign a stockholders’ agreement—which will give small shareholders a voice in these big decisions.
Stockholders’ agreements are more commonly used in certain circumstances: for example, when some shareholders are not directors and thus do not have much of a role in the decisions of the board, or in the case of equal-stake joint ventures.
A stockholders’ agreement will establish the constitution of the board, the number of directors, which shareholder(s) will have the right to appoint directors (and how many), and who will be the chairman of the board and have the casting vote if needed. It will also decide who will have management control and how board meetings and voting will operate.
The agreement can also establish that certain business issues will require the approval of 100% of the shares. These are usually only very important issues, such as: the company entering into a contract with directors or shareholders; the incurring of expenditure or liability over a certain predetermined value; the company giving a guarantee or taking on an encumbrance (debt) of a certain value; the sale, transfer, lease, or licensing of any of the assets of the company other than in the ordinary course of business; or the altering of any provisions of the company bylaws.
In general, a stockholders’ agreement is a contract between shareholders that can stipulate more or less anything, as long as it does not contravene the law or the bylaws of the company
Advantages
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Stockholders’ agreements protect minority shareholders and allow them to participate in decisions from which they might otherwise be excluded.
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Stockholders’ agreements are not regulated. Shareholders have the flexibility to decide the type of contract they want.
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The stockholders’ agreement can also restrict the transfer of shares and will establish pre-emption rights (the right of existing shareholders to be the first to acquire the shares of another shareholder).
Disadvantages
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Assenting to a stockholders’ agreement may involve extensive negotiations and require professional advice. It could be expensive to draft and put in place.
Action Checklist
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Study any shareholder agreement carefully before signing. Be clear what you would like to achieve from it.
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Be prepared for extensive negotiations, which could prove time-consuming as well as costly.
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Economize by negotiating a reasonable rate with your legal and financial advisers, but remember that it is better to incur costs and understand the agreement you sign than to enter into an agreement that you do not understand and may not represent your interests.
Dos and Don’ts
Do
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Involve your lawyers in the negotiation of a stockholders’ agreement.
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Think carefully what you would like to achieve from it.
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If necessary, request the right to appoint a director as your representative on the board. In this way, you can influence decisions in the company at board level.
Don’t
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Don’t make the mistake of entering into a stockholders’ agreement that you do not understand and does not represent your interests.
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