The importance of a Shareholders Agreement and Memorandum of Incorporation

Описание: These two documents are vital for companies to regulate the relationship between shareholders, directors, the company and other stakeholders.

An essential element of corporate governance, but only one of the elements of corporate governance, is to ensure there is proper documentation which regulates the relationship between shareholders, the company directors and other stakeholders. Part of this process would be to ensure that there is proper agreements in place in order to regulate those relationships. Two of those agreements would be the memorandum incorporation, or the MOI, which is a public statutory document and a shareholders agreement, which regulates the relationship between the shareholders. Properly constituted and drafted documents of this nature are absolutely vital to ensure the important running of the corporate governance elements of the company.

We often get consulted by clients for matters of shareholding and often the question is that they would like to exit as a shareholder and want to know how they go about. Alternatively they may need to elect directors and not know how to go about it or perhaps a matter has arisen and they are uncertain as to whether it should be determined by shareholders or if it falls within the preserve of directors. Inevitably before I can advise, I ask my clients to show me their shareholders agreement or MOI and more often than not, they won’t have one. Alternatively they'll say to me that they purchased a stock standard shareholders agreement or MOI but when you look at the provisions, it doesn't speak to their unique relationship.

A Shareholders Agreement is a contract between the shareholders of a company, and in some circumstances it may include the company itself. The Shareholders Agreement generally regulates the relationship between the shareholders. The important part of a Shareholder’s Agreement is that it must be consistent with the provisions of the Companies Act and the MOI. To the extent that it isn't, it will be unenforceable to the extent of the inconsistency.

The MOI replaces the Memorandum and Articles of Association, which we had under the previous Companies Act, and combines it into one document. The MOI regulates the relationship between shareholders and directors and deals with predominantly matters of governance. Again the MOI needs to be consistent with the Companies Act and, to the extent that it is not consistent with the Companies Act, it will be unenforceable to the extent of that inconsistency.

Often the provisions of the Shareholder’s Agreement will be dictated to by the identity of the shareholders. For example, the shareholder may be a natural person, they could be a for-profit company, a not-for-profit company or even a family structure, which includes trusts and companies behind it or any combination thereof.

Certain provisions of the Shareholder’s Agreement will deal with rights of pre-emption over shares. So typically if a shareholder is going to exit, the Shareholder’s Agreement will deal with the process of offering acceptance of those shares, including the purchase price and the terms payable in respect thereof.

A key aspect of the Shareholder’s Agreement is the value of the shares. This is often reflected in a formula in the Shareholder’s Agreement. Alternatively a third party is called upon to express the view on valuation. Funding is also a very important component. The funding of a company has to be agreed upfront between shareholders. The terms of that funding would need to be agreed, as well as the terms of repayment, whether those loans would be interest-bearing or non-interest bearing and whether the company itself would look to third parties to obtain borrowings.

There certain other provisions in the Shareholder’s Agreement which would be included and would be unique to the parties concerned. For example, restraint of trade provisions certain, confidentiality provisions or it may also deal with the rights and duties of each shareholder and what they need to bring to the table.

The MOI generally deals with matters of governance and those matters which will take precedence over the provisions of a Shareholder’s Agreement. The MOI itself will deal with the director’s meetings, the quorum requirements around the directors meetings, as well as the voting rights to be exercised by each director at a meeting. It will also deal with the election of directors and whether any shareholder themselves has the right to appoint and remove a director as regards shareholder’s meetings. Again the MOI will deal with the quorum requirements of shareholder’s meetings and the voting rights of the shareholders. The MOI will focus on the thresholds for a special resolution of shareholders and ordinary resolution of shareholders bearing in mind that there needs to be 10 points between each of those thresholds. The MOI itself will deal with the classes of shares as well as the rights attributable to each class of shares.