A guide to shareholders’ agreements for businesses in Ireland

A guide to shareholders’ agreements for businesses in Ireland

By: Damien
14 Oct, 2022
Growing businesses may seek external funding through issuing shares – but if you’re doing this it’s advisable to draw up a shareholder agreement first. This guide outlines what ought to be included in the agreement.

For owners of small to medium-sized businesses, to achieve their growth ambitions with their company takes funding. While this can be done through internal investment of profits, businesses often seek external funding to achieve this as they can generally raise more money, which is needed to take the company to that next level. One of the most common ways to do this is through issuing shares in the business to third parties for a set price.

While this can bring in the funds needed to scale the business, it does mean there are more people who can have a say in the running of the business. With this comes greater potential for conflict, which is why it is strongly advised for any company to draw up a shareholder agreement. That that everyone knows their rights. This guide provides an overview of what a shareholder agreement should contain.

Shareholder agreement – what is it?



As the name suggests, a shareholder agreement is an agreement involving those who own shares in the company – be they individuals or organisations such as venture capitalists and the directors who run the business.

The agreement, which is legally binding, should encompass the rights and obligations bot for the company and those who hold the shares, including who has control of what, how profits are distributed and how shareholders can leave the business by selling their stake or when and how the company can be sold.

While shareholder agreements are not a legal requirement in any business, if there are two or more shareholders it is recommended to have one to avoid potential for future arguments.

A shareholder agreement is legally binding, so all aspects must be understood by all parties before pen is put to paper. If necessary, take advice from your accountant and/or lawyer before committing to anything.

Relationship between the company constitution and shareholder agreement



  The shareholder agreement also has a key relationship with the way the company is constituted. A constitution is a legal requirement when establishing a business in Ireland, and it should be ensured the shareholder agreement is consistent with this and no conflicts can be found between them. If it is later found there is a conflict between the two, then a clause ought to be put into the shareholder agreement stating that in conflict situations the shareholder agreement is given primacy.

Please note, a company’s constitution can be viewed by the public, but a shareholder agreement is private.

What should be included in a shareholder agreement?



There are four main criteria that ought be set out in a shareholder agreement.

Firstly, focus should be given to how the directors conduct themselves and how the business is run. It is recommended that this includes specifics such as how many directors there are, who has the right to appoint them and how many directors meetings should be held in a year.

Other details commonly included are the number of directors needed in attendance for a meeting to take place and any rights for observers to attend and contribute to these meetings, but not have a vote. It can also cover issues such as weighted voting, where a director can cast more votes than others on the board, but this is relatively uncommon.

Secondly, a catalogue of shareholders rights should be set out in the agreement, along with guidelines on what the company can and cannot do without the advance agreement of a set number of stakeholders.

Thirdly, an agreement should define how shares can be transferred, such as whether there can be an outright veto on them or which transfers can be made.

Finally, it should cover the mechanics of how shareholders can leave the company. This encompasses which people are able to start a sale process and who is eligible to receive what from the business when it is sold, especially if there are more than one class of share in the business.

A shareholder agreement normally includes specific rights, such as ‘drag along’ – in this case, an agreed percentage of shareholders – above 50% – want to offload their stake, they are able to compel the minority to sell their stake to the same buyer for the same price. Similarly, ‘tag along’ rights allow for a when a set majority is selling its stake, but elect not to compel a minority to also sell, tan minority can choose to compel themselves to sell, again to the same buyer and at the same price.

Some pre-emption rights are also often included in an agreement. for instance, in cases were a shareholder is selling their stake, they are obligated to give all other shareholders the chance to buy them – even if they want to sell their shares to an external party, they have to give current shareholders first refusal.

Likewise, if a business is seeking to sell new shares to an external buyer, current shareholders have to be given the chance to buy them first. These new shares can only be offered to the external buyer if those current shareholders do not want to buy them.

Backup

A shareholder agreement is most useful when there is a conflict between the shareholders and the directors running the business. Without it, there is potential for disputes to escalate, but an agreement can outline – in a legal document – what is expected of whom, meaning disputes can be often swiftly resolved. It is also means it is important when the agreement is being drafted that it is written in a way that doesn’t block the directors from running the business.

For companies at the early stages of growth that may want more outside investment in the future, then it is advisable to ensure that the constitution and shareholder agreement are clearly documented and understood as any future investor will want to see these.

Get advice

As this guide shows, shareholder agreements can be important documents for growing businesses and, while not a legal requirement, there are many benefits of putting one in place. If you want to create one, it is always advisable to seek expert advice from a financial adviser such as Malone & Co. At Malone & Co, our financial experts have in-depth knowledge of the financial aspects of a shareholder agreement, and what should be included to best fit with your business.

Malone & Co Accountants https://www.maloneaccountants.ie/ can assist on all the relevant aspects of raising funding, including the risks involved, as well as anything from setting up a company and ensuring it is as tax efficient as possible to providing diligence services as part of an M&A deal or funding round in the sector. We can also provide in-depth information to ensure any deal achieves the value hoped for at the outset. Ends
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