Building a Solid Foundation: Key Clauses for Shareholders Agreements

Restrictive Covenants

These are provisions which prevent a shareholder from doing certain things for a set period of time after they cease to be a shareholder of the company. For employee shareholders, these clauses are usually also found in service contracts.

Notwithstanding this, such provisions should still be included in a shareholders’ agreement to protect the company even after a shareholder leaves as an employee and because courts may view restrictive covenants in shareholders' agreements as more reasonable (and thus more enforceable) because they relate to the protection of ownership value.

Typical examples of restrictive covenants include:

• (i) non-competition provisions whereby the exiting shareholder agrees not to set up a business in competition with the company for a period of time following their exit
• (ii) provisions regarding the non-solicitation of customers and employees, whereby the exiting shareholder agrees not to poach the company’s customers and employees
• (iii) non-disparagement provisions whereby the exiting shareholder agrees not to make damaging statements about the company.

A shareholders’ agreement will typically contain provisions which entitle shareholders who hold a certain percentage of the shares in a company to appoint and maintain directors of the company.

This gives minority shareholders a say in how the company is run as they may be able to exert a degree of influence at board level.

These provisions set out how conflicts between shareholders or between shareholders and the company will be resolved.

The idea behind including these clauses is to minimise the costs of litigation and the risk of business interruption in the event that disputes arise.

Typical dispute resolution provisions found in shareholders’ agreements are:

• (i) negotiation clauses requiring shareholders to resolve disputes amicably in the first instance; (ii) mediation or arbitration clauses in the event a dispute cannot be resolved amicably;
• (iii) expert determination clauses whereby the value of shares is determined by a mutually agreed expert and finally a court jurisdiction clause in circumstances where the parties decide to formally litigate. There are also specific “deadlock” provisions in shareholders’ agreements for company’s with only two shareholders such as “shotgun” clauses which enable one shareholder to offer to buy out the other at a specific price per share.

While shareholders have certain rights to enforce the a company’s articles, the shareholders can act for their own benefit without considering other members. Accordingly, a shareholders’ agreement is useful for documenting matters which may require direct enforcement as between the shareholders and the company.