A Shareholders’ Agreement: The Essentials

So you’ve finally taken the plunge, opened a business, with a friend or relative perchance that you’ve known for years, and you’re full of trust and feel comfortable about your roles and responsibilities in the business. Then again, a 2016 survey by the Kenya National Bureau of Statistics reveals that about 400,000 micro, small and medium enterprises (MSMEs), almost half of them, did not survive the first year, in the last five years. And 75% of them did not survive 5 years after inception. Only 10% are able to stay afloat after 10 years. Some of the reasons for this include a lack of clarity in planning, poor decision making, and bad investor and toxic culture. A well-crafted shareholders’ agreement will go a long way in clarifying your rights and obligations, cementing the nature of engagement between yourselves, and prevent or minimize expensive legal battles when you disagree.

Shareholders’ agreements are agreements between shareholders in a company. They provide rules to govern the running of the company by defining what level of control a shareholder has over the business and affairs of the company and its management. During the negotiation of a shareholders’ agreement, the shareholders are in a way educated, or reminded, on how to run their company in a prudent manner and according to prevailing company law that guides their engagements with one another and the management.

A shareholders’ agreement may be negotiated to bind some or all of the shareholders in a company. New incoming shareholders would then be required to be bound by it by signing a deed of adherence. Minority shareholders may however enter their own agreement to protect their interests.

A shareholders’ agreement is used as a supplementary to the articles of association, which are mandatory documents filed with the Companies Registry in Kenya. Though not mandatory, if well drafted, they can be powerful complimentary documents to privately deal with conflicts and matters that Shareholders do not wish to be provided in the articles of association.

A shareholders’ agreement may provide for any and all issues the shareholders wish, however, there are certain clauses that are expected in an agreement. These clauses:

1. Define the business(es) of the company and the method(s) of carrying on the same;
2. Define the composition of the Board and how their meetings will be convened and conducted;
3. Provide for reserved matters which will require agreement of all shareholders, or a certain majority;
4. Define how shares will be issued and transferred, including the powers and limits of minority and majority shareholders;
5. Set out the powers of the board vis-a- vis the shareholders in general or special meetings;
6. Set out checks to prevent dilution of existing shareholders’ shares during allotment of new shares;
7. Define the funding and dividend policies;
8. Provide for methods of resolution of disputes between shareholders including how to handle a deadlock situation;
9. Set out protections to prevent shareholders from using intimate company knowledge to compete with the company;
10. Prevent a situation where changes in one shareholder’s personal circumstances can have an adverse effect on the company or other shareholders; and
11. Set out the limits and procedures for how the company should be operated.

A shareholders’ agreement will provide for various situations that may not arise, but if they did, are well planned for, to ensure the survival of your business.

Photo credit: https://www.projectmanager.com/blog/stakeholder-vs-shareholder

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So you’ve finally taken the plunge, opened a business, with a friend or relative perchance that you’ve known for years, and you’re full of trust and feel comfortable about your roles and responsibilities in the business. Then again, a 2016 survey by the Kenya National Bureau of Statistics reveals that about 400,000 micro, small and…