Berkeley Legal | Shareholders’ Agreement: Key Provisions and their Relevance
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18 May Shareholders’ Agreement: Key Provisions and their Relevance

It is in the best interest of shareholders and the company concerned to have in place a shareholders’ agreement prepared to cover their rights and obligations.

A Shareholders’ agreement is an agreement between a company and its shareholders/members which regulates the operation and ownership of the company, that is, the relationship between the company and its members and vice versa.

A Shareholders’ agreement clarifies the rights and obligations of each party with respect to issues such as appointment of directors, rights and obligations on transfer of shares inter alia. It also specifies the level of authority of shareholders/Directors in making company decisions while protecting the investments of shareholders and establishing a fair and equitable relationship between shareholders.

The agreement provides clarity on shareholders’ entitlements, duties, decision making, exit strategies and other relevant provisions. It protects the company from circumstances that may result in dispute amongst shareholders or shareholders and directors.

This article seeks to identify some of the key provisions of a Shareholders’ agreement and the pertinence of same. Some of these provisions are stated below;

  1. Voting Rights

The decisions of a private or public company are based on votes of the shareholders at Annual General Meetings or the Extra Ordinary General Meetings. A shareholders’ agreement must provide for the voting capacity of the shareholders, especially where there are different classes of shares. Usually, voting rights vary according to the class of shares and these rights must be expressly spelt out to avoid unnecessary ambiguity. Some of the decisions made via voting rights include the appointment/removal of directors, auditors, inter alia.

  1. Pre-emptive Rights

This right gives certain shareholders of a company, the opportunity or option to purchase newly issued shares of the company before it is offered to other classes of shareholders or the public in general. This offer is made in a manner proportionate to the existing equity ownership percentage or in any other manner unanimously agreed in the Shareholders’ agreement. This provision ensures the ownership interest and voting power of shareholders who may fear that their shareholding percentage will reduce as a result of the company offering shares to the public.

  1. Right to First Refusal

This provision prevents a shareholder from selling his shares without first offering same to the existing shareholders. It gives the shareholders the right to purchase or refuse the offer of shares before the said offer is made to a third party. The clause also makes provision for the transfer of the shares after the offer might have been accepted or where the selling shareholder refuses to transfer the shares. The aim of this clause is to prevent unknown third parties from acquiring controlling shares in the company, particularly those who have no interest in the objects or already set out vision of the company.

  1. Drag-Along Rights

This provides for the right a majority and minority shareholder will have in a future sale transaction of the company. It typically arises at the point of a merger or acquisition of a company. It allows a majority shareholder to coerce a minority shareholder into participating in the sale of the company or majority shares of the company. Usually during mergers, some minority shareholders may disagree with the proposed sale thereby protracting the merger/acquisition process. This clause ensures that the majority shareholder while exercising his overriding power, gives the minority shareholder the same price, terms and conditions as he has offered other shareholders. The clause aims to protect both shareholders.

  1. Tag-Along Rights

This is also known as a Co-sale right. It usually comes up where a majority shareholder sells his shares and the minority shareholder, not wanting to be left out, gets to sell his shares at the same time and price as the majority shareholder. Basically, the minority shareholder ‘tags along’ with the majority shareholders’ sale. This clause seeks to protect the minority shareholder on the basis of the fact that after the shares of majority shareholders have been purchased, the minority shareholders are forced to sell their shares at substantially lower prices compared to the original value of the company itself, in other words, devaluation comes to play.

  1. Right of First Offer

The right of first offer is a contractual obligation on the seller of shares to offer them first to a particular shareholder or group of shareholders. This clause is an advantage to the Seller and gives the purchaser a time frame to make an offer on the shares to be sold. The seller may either accept or decline to sell to the buying shareholder if the price is not right and thus offer the shares to third parties. The difference between this and the right of first refusal is the fact that the buying shareholder is at an advantage in the latter situation. These provisions must be clearly stated out in the shareholders’ agreement to avoid dispute between shareholders.

  1. Non-Compete Clause

The provisions of a non-compete clause are one of the key issues of a shareholders’ agreement. It prohibits or limits a shareholder from participating in competitive activities or transactions during or after the shareholders’ involvement with the company (sale of shares). Usually, most shareholders are privy to certain company information which ought to be confidential, such as trade secrets. The non-compete clause is included to protect and benefit all shareholders by preventing any of the owners of the company from using confidential information to start or contribute to a rival/competing business. It is important that this clause identifies expressly, the specific commercial activity that is considered competitive so as to clarify any ambiguities.

  1. Dispute Resolution

It is likely for conflict to arise between shareholders or between the directors and shareholders as a result of some decisions. Just like any other private contract, the shareholders’ agreement must provide options for the settlement of dispute, should any arise. It must provide different stages of resolution as well as the parties responsible for seeing it through and the effect of the decisions made during resolution.

Other key provisions of a shareholders’ agreement include Exit rights, Appointment of directors and key officers, Financing and accounting regime and Confidentiality. These provisions must also be expressly stated to avoid loopholes being exploited by shareholders.

Berkeley legal offers company secretarial services which includes the drafting of shareholders’ agreement based on the structure of the company. We are capable of advising your company on the suitable clauses and the effects of same.


The information provided in this article is for general informational purposes only and does not constitute legal advice. If you require specific legal advice on any of the matters covered in this article please contact