Shareholder Agreements – Part Three

Shareholder Agreements: 3) Participation in management and protection of minority shareholders

Without a shareholder agreement, a simple majority of the directors can decide on major decisions such as:

• major capital expenditures;

• borrowing or granting security for capital expenditures;

• distributing profits;

• remuneration of key employees;

• contracts between the company and shareholders;

• conducting non-arm’s length transactions;

• changing signing officers;

• approving budgets;

• entering into major contracts;

• contracts out of the ordinary course of business;

• acquiring or disposing of property; and

• issuing dividends and additional shares.

This can cause major problems for minority shareholders, who can effectively be frozen out of the company. A shareholder agreement can prevent against this by requiring a special majority of two thirds, three quarters or all shareholders to approve such decisions.

However, shareholders also need to ensure that management decisions can be made without undue delay or gridlock, so shareholders should consider carefully which decisions will be subject to special majority vote.

Minority shareholders also might want to negotiate other protections into the shareholder agreement, such as:

• Dilution avoidance – If the company issues more shares, minority shareholders are granted an option to buy the number of shares that would maintain their percentage in the company

• Mandatory buy out – This triggers the buyout of an unhappy shareholder at a fair price

Located in: Corporate and Commercial Law