Who Needs a Shareholders’ Agreement? When a corporation is created and more than one person will be investing money into the company, a shareholders’ agreement is essential. This document should be drafted and signed right when a corporation is formed to avoid any issues or confusion when setting up the company.
The only parties who are bound by a shareholder agreement are the shareholders that sign it; minority or majority.
However, we strongly recommend that a shareholder’s agreement is created when a business is started or if new shareholders enter the venture. The shareholder’s agreement is binding only for those that sign the document.
If it is clear that the parties have agreed the terms of the shareholders’ agreement but never formally executed it, then it can be binding on them.
It is essential to regulate the shareholder’s agreement because not every shareholder who is a part of the company is the same. … It will be uncertain to say that there will be no problems and disputes which might arise while investing in a company. Hence, the company has to be prepared for such situations as well.
A shareholders’ agreement is a legally enforceable contract and the rules on its enforceability, and the remedies available in the event of a breach, will in many cases be the normal rules of contract law.
A shareholder agreement is a contract between two or more shareholders and is treated as a regular commercial contract. It is subject to the articles and by-laws of the corporation and the provisions of the relevant corporate statute.
Since a shareholders’ agreement establishes the relationship between the shareholders, without one, you are exposing both shareholders and the company to potential future conflict. This is particularly true in situations where the voting shares in a company are held equally (50% each) by just two people or companies.
Is an unsigned contract legally binding South Africa?
An informal verbal contract that was not intended to be binding until reduced to writing and signed, does not constitute an enforceable contract until signed by both parties.
A shareholders’ agreement will usually contain provisions requiring directors and shareholders to keep confidential all matters relating to company business. In addition, it may contain provisions preventing shareholders starting competing businesses or dealing with customers of the company.
A Shareholders’ Agreement can provide a mechanism which, where one shareholder wishes to sell their shares, effectively gives the other shareholders or the company (as the case may be) a “right of first refusal” over those shares. This can be used to try and restrict who may or may not acquire shares in the company.
Only individuals (i.e., physical persons) may be directors of a corporation. An Alberta corporation requires that at least 50% of directors be Canadian residents. Directors may also be shareholders and officers (see below) of the corporation.