Shareholders Agreements have a multitude of uses: decoration for the bottom drawer of the filing cabinet, use as scribble paper on the unprinted side, computer screen riser wedged in between two reams of copy paper… oh and regulating the affairs and interactions as between shareholders and management of a company.
Unfortunately, the last use is often overlooked. Once a business is off and running, like many other constituting documents of a company, the Shareholders Agreement is often not given a second thought or looked at again. That is, until such time as a dispute arises and parties need to be informed as to their rights and obligations. With many businesses experiencing hardship at the moment, timing is ripe for such disputes. When they do arise, one of the first questions your lawyer will ask you when you seek advice as to your rights is: Do you have a Shareholders Agreement and what does it say?
In times of financial hardship such as these, disputes can often arise about management decisions, cashflow allocation and access to information in a business. A good Shareholders Agreement can set the parameters for parties rights and obligations in all these areas. Thus important lessons for parties which may be in the early stages of a potentially disruptive dispute with fellow shareholders is to:
- Understand your rights as set out in the Shareholders Agreement;
- Ensure you comply with your obligations under that agreement;
- Seek to resolve disputes amicably by openly discussing with fellow shareholders the rights and obligations set out in the agreement.
Often times, parties will disregard their ongoing obligations under the Shareholders Agreement because past breaches have not caused disputes and it becomes generally accepted by parties that there is a way things ‘should be done’ and ‘the way they are done’.
Parties should however be mindful that, just because technical breaches of the Shareholders Agreement have been overlooked in the past doesn’t necessarily mean that a party will not seek to enforce its rights in the future. Thus a cautious approach to compliance with the rules in the agreement in times of crisis can be fundamental in avoiding serious repercussions. As a prime example, some Shareholders Agreements may set out a process of compulsory acquisition of a shareholder’s shares where they have breached a material term of the agreement. Such a clause may be used to force out a shareholder, even in circumstances where the breach complained of has in the past not been raised as a concern.
If you would like assistance in understanding what your company’s Shareholders Agreement says and interpreting what it means in the context of a present dispute, get in touch with us for on-point, practical guidance.