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Shareholders Agreements

Shareholder Relations

The basic difference between a Shareholders Agreement on the one hand and the Constitution on the other is that the first mentioned document governs the relationship existing between the shareholders whereas the Constitution governs the relationship that the company shares with the world at large.

The standard Constitution provides little assistance in things like resolving disputes or providing a means to value shares if one shareholder wants out.

This problem increases in privately owned, closely held corporations where, because the shares cannot be easily traded, their basic nature is that of an asset which is not liquid.

Disputes in any corporation largely revolve around power and money.

Certain types of relationships or scenarios usually indicate the need for a shareholders agreement, for example:

  • Where there is a potential of a generational change in the ownership of a closely held corporation and where the second generation may compete or conflict with key employees.
  • Where the shareholders are basically partners and are equal in number – it is a quasi partnership and where all are involved in the business, particularly if spouses are thrown into the equation.
  • Where there may be one shareholder providing capital, not involved in the business or its day to day management or control.
  • Where a shareholder is in only for a short time with the intention of being bought out at some time.
  • To protect a minority/majority.

Share Valuation

Probably the most common dispute that occurs when it all comes unstuck is working out a fair method of valuing the shareholding of the person who wants to sell out.   The valuation can be determined either by reference to a process of valuation or by an internal method not utilising a valuation.

The process of valuation may involve either referring by agreement the valuation to a third person, or to a nominee of a body like the “Institute of Chartered Accountants”, or it may involve applying an agreed formula with or without the assistance of a third person.   The agreed formula may be assets based (e.g. net tangible assets) or earnings based (future net maintainable earnings after or pre-tax earnings over a cost of equity basis) or a combination of the two to arrive at a figure for goodwill.

The internal method of valuation may be defined by adopting a procedure such as the sealed tender method where the parties nominate a figure and put it in an envelope to be opened by a third person or it may be based on an internal auction to be conducted with the assistance of a third person using a set out procedure for bidding orally or in writing.

To navigate these complexities and ensure your Shareholders Agreement effectively addresses your company’s unique needs, seeking guidance from a business lawyer is highly advisable. Their expertise can help you establish a robust framework for shareholder relations and dispute resolution, ultimately safeguarding the interests of all parties involved in the corporation.

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