Shareholder Agreements protect Minority Shareholders

A minority shareholder in a company not listed on the stock exchange is in quite a vulnerable position.

With less than 50% of the shares, the majority holder can, among other things,

  • operate the business so that few profits are available for distribution as dividends;
  • take the company in a direction you don’t like; and
  • award himself overly-generous benefits and bonuses;

without your say.

Being unlisted means that it might be difficult to find someone to buy the holding if the need arises.

Often unlisted companies have pre-emptive rights that require them to be offered to existing holders first.  Even if they were willing what should the price be?

Prospective minority shareholders can protect themselves by implementing a shareholder agreement prior to taking up their shares.

A shareholder’s agreement contractually binds the other shareholders to certain conditions and obligations that can greatly mitigate against being treated unfairly.

Common elements of a shareholder’s agreement include provisions that require:

  1. A seat on the board
  2. Certain decisions requiring special resolutions
  3. Performance targets for management and various outcomes depending on the results
  4. How dividends will be determined and distributed
  5. Employment conditions for executive directors and key management
  6. Mechanisms for trading shares and how how share prices will be set

The idea of a shareholder agreement is only useful if it is implemented before entering into a minority ownership while the investor or new entrant has some bargaining power.

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