Shareholders’ Agreements: What You Need To Know

Is your company growing or scaling? Are you seeking external funding? Do you need to offer shares in your company to potential shareholders?

We recently hosted a Business Growth Webinar with Robert Dickson, Corporate Partner at leading law firm Mason Hayes & Curran LLP and he shared his expert knowledge of Shareholders’ Agreements, Constitutions and certain rights of a company and its shareholders.

Robert has experience in a broad range of industries from technology, to food and beverage, to professional services and more. He advises on areas such as Shareholders’ Agreements, mergers & acquisitions, reorganisations, equity investments, partnerships, and venture capital, so Robert’s knowledge is very relevant to startups and scaling companies.

In this blog, we’re sharing the most popular questions asked during the Business Growth Webinar:

1. What are Shareholders’ Agreements?
2. Are Shareholders’ Agreements always needed by companies with more than one shareholder?
3. Is there a Shareholders’ Agreement template?
4. Can an accountant give an opinion on Shareholders’ Agreements?
5. What’s the difference between the Constitution and a Shareholders’ Agreement?
6. What’s in a Shareholder’s Agreement?

Shareholders’ Agreements are legally binding contracts between the people or entities who own the company, i.e. its shareholders, and (usually) the company itself.

It could be considered as the “playbook” for the company as it outlines the company’s and shareholders’ rights and obligations, including processes for certain scenarios, such as exit mechanics and transferring shares.

Shareholders’ Agreements are not legally required in any scenario and are not needed in single-member companies (i.e. a company that has just one shareholder).

However, if there is more than one shareholder, Robert generally recommends that the company should adopt a Shareholders’ Agreement unless the company is at a very early stage and there is a cost or strategic reason to avoid doing so.

There are templates available online, but Robert warns that you should be careful about signing any document containing any terms you don’t fully understand and which you have not been advised on. Even if there are only discrete areas of the document that are unclear to you, you should seek advice on those aspects.

Shareholders’ Agreements are legally binding contracts so although getting advice can cost money, advice on even very targeted aspects of an agreement such as this can be available at a low cost and can save you a lot of money in the long term.

If you have questions about the contents of a Shareholders’ Agreement, talk to Robert via email (rdickson@mhc.ie) or visit MHC.ie.

If you have already hired an accountant that you consider to be a trusted advisor, it’s natural to want to seek their advice on a Shareholders’ Agreement.

On the other hand, accountants won’t have the knowledge to give a legal opinion and wouldn’t usually be an expert about this topic, so any questions about legal documentation should be directed to a solicitor or legal firm like MHC.ie.

1. Requirement. Every Irish Limited company needs to have a Constitution in order to set up – you can’t set up a company without one and a company needs to have one at all times. On the other hand, a Shareholders’ Agreement isn’t legally required and would only be entered into when there is more than one shareholder.
2. Accessibility. The Constitution is publicly available whereas a Shareholders’ Agreement is a private and confidential document.
3. Shareholders’ Agreements should prevail over the Constitution. A Shareholders’ Agreement should be consistent with the Constitution so it’s important that no provision in the Constitution conflicts with your Shareholders’ Agreement. In case there is an inadvertent conflict between the terms of the two documents, it is important to include a term in the Shareholders’ Agreement stating that in the event of a conflict between the two documents, the Shareholders’ Agreement will prevail.

This clause sets out specific details on how the company is to be run at board level.

The general details include:

• Number of Directors
• Who has the right to appoint them?
• Number of Directors’ meetings annually
• Quorum / Quorum for a re-convened meeting (i.e. the number of Directors that need to be present for a meeting to proceed)
• Observers’ rights (i.e. this can be any individual person who has the right to contribute to the debate / go to a meeting, but he/she doesn’t have a vote)
• Weighted voting – although this is more unusual, it’s sometimes seen in certain situations where one Director has the right to exercise 3 votes vs. the other Directors only have the right to cast a single vote

This is a hugely important part of a Shareholders’ Agreement. For example, it sets up the terms of a shareholder exiting the company, who can trigger a sales process, and who gets what on an exit when there are different classes of shares (also known as a waterfall).

The following rights are usually included in the Shareholders’ Agreement or Constitution:

1. Drag along. If a specified majority is selling their shares, they can force a minority to sell to the same third party at the same price.
2. Tag along. If a specified majority is selling their shares but decides not to force the minority to also sell, the minority can force themselves into the sale and sell to same third party at the same price.
3. Pre-emption on transfer. The selling shareholder has to offer the right to participate to every other shareholder. This means that if you want to sell your shares to a third party, you must offer to sell your shares to the other shareholders first.
4. Pre-emption on an allotment. If the company wants to allot new shares to a third party, it must offer these shares to the existing shareholders first and only if the existing shareholders turn it down can the company allot new shares to a third party.