A Shareholders Agreement is a legally binding contract negotiated by the shareholders of a company, designed to govern their relationship, business arrangements, rights, responsibilities, obligations, and liabilities. It supplements the company's constitution by addressing matters not covered therein, thus offering more comprehensive protection and clarity.

1. Preventing Disputes: The agreement ensures that all shareholders have discussed and agreed upon the terms of their relationship while everyone is on good terms, which can prevent conflicts later on when circumstances change.
2. Clarity and Certainty: It provides clear guidelines on income allocation, decision-making processes, and dispute resolution, reducing ambiguity and potential disagreements.
3. Protection for Minority Shareholders: It safeguards the rights of minority shareholders from being overridden by majority shareholders, ensuring fair treatment and protection of their interests.
4. Attracting Investment: A well-drafted agreement demonstrates stability and good governance to potential investors, making the company more attractive for investment.
5. Managing Changes: It outlines procedures for managing significant changes such as the death of a shareholder, sale of shares, or new shareholder admissions, ensuring smooth transitions and continuity.

Before drafting a Shareholders Agreement, company owners should consider the following questions to ensure all critical aspects are covered:

1. What are the roles and responsibilities of each shareholder?
2. How will decisions be made and who has the authority to make them?
3. What process will be followed if a shareholder wants to sell their shares?
4. How will disputes be resolved?
5. What are the financial commitments and expectations of each shareholder?
6. How will profits and losses be distributed?
7. What happens in the event of a shareholder's death or disability?
8. Are there restrictions on shareholders competing with the company post-exit?
9. What are the procedures for admitting new shareholders?

A comprehensive Shareholders Agreement should include the following sections:

1. Introduction and Purpose: Outline the agreement's purpose and the parties involved.
   
2. Business Operations:
   
   • Management Structure: Define the roles of directors and the management team, including their appointment and removal processes.
   • Decision-Making: Specify how decisions will be made, distinguishing between those requiring unanimous consent and those needing a majority.
3. Financial Matters:
   
   • Capital Contributions: Detail each shareholder's financial commitments.
   • Profit Distribution: Outline how and when profits will be distributed among shareholders.
   • Dividends: Define the policy for declaring and paying dividends.
4. Shares and Ownership:
   
   • Issuance of Shares: Procedures for issuing new shares and the rights attached to different classes of shares.
   • Transfer of Shares: Restrictions and procedures for transferring shares, including rights of first refusal and drag-along/tag-along rights.
   • Valuation: Methods for valuing shares during transfers or exits.
5. Dispute Resolution:
   
   • Mediation and Arbitration: Establish mechanisms for resolving disputes through mediation or arbitration before resorting to litigation.
   • Deadlock Provisions: Procedures to follow if shareholders are unable to agree on significant decisions.
6. Confidentiality and Non-Compete:
   
   • Confidentiality: Obligations of shareholders to keep company information confidential.
   • Non-Compete Clauses: Restrictions on shareholders engaging in competing businesses post-exit.
7. Exit Strategies:
   
   • Buy-Sell Provisions: Terms under which shareholders can sell their shares, including buyout options.
   • Event of Death or Disability: Provisions for handling shares in the event of a shareholder's death or permanent disability.
8. Miscellaneous Provisions:
   
   • Governing Law: The jurisdiction governing the agreement.
   • Amendments: Procedures for making changes to the agreement.
   • Duration and Termination: Conditions under which the agreement can be terminated.

• Operational Clarity:
  
  • Daily Operations: Define who manages day-to-day operations and the extent of shareholders' involvement.
  • Performance Management: Set performance metrics and management procedures to ensure business goals are met.
• Financial Reporting and Control:
  
  • Regular Reporting: Establish the frequency and format of financial reporting to shareholders.
  • Audits and Reviews: Procedures for conducting audits and reviews to maintain financial transparency.
• Director and Shareholder Meetings:
  
  • Frequency and Conduct: Specify how often meetings should be held, quorum requirements, and conduct during meetings.
  • Special Resolutions: Identify resolutions that require unanimous or special majority approval, such as significant financial decisions or changes to the company's structure.
• Class Rights and Preferences:
  
  • Share Classes: Differentiate between classes of shares, their rights, and preferences, including voting rights and dividend entitlements.
  • Veto Rights: Conditions under which shareholders can exercise veto rights on critical decisions.
• Transfer and Exit Mechanisms:
  
  • Transfer Restrictions: Outline any restrictions on the transfer of shares to maintain control and prevent unwanted parties from becoming shareholders.
  • Exit Strategies: Provide clear procedures for shareholder exits, including buyout options and valuation methods to ensure fair compensation.
• Breach and Dispute Resolution:
  
  • Breach Consequences: Define the consequences of breaching the agreement, including potential penalties and remedies.
  • Dispute Mechanisms: Establish a hierarchy of dispute resolution methods, from internal discussions to external arbitration or legal action, to resolve conflicts efficiently.
• Accession and Amendments:
  
  • New Shareholders: Procedures for new shareholders to join, including the requirement to agree to and sign the Shareholders Agreement.
  • Amendments: Conditions under which the agreement can be amended, typically requiring unanimous consent to ensure all parties agree to changes.

A critical aspect of a well-drafted Shareholders Agreement is planning for unexpected events such as the death or permanent disability of a shareholder. These scenarios can have significant financial and operational impacts on the business and its remaining shareholders. Buy-sell insurance is a strategic tool designed to mitigate these risks, ensuring the continuity of the business and protecting the financial interests of the deceased or disabled shareholder's family.

What is Buy-Sell Insurance?

Buy-sell insurance is a type of life and disability insurance policy specifically tailored to fund a buy-sell agreement. This agreement obligates the remaining shareholders to purchase the shares of a deceased or disabled shareholder, and the insurance policy provides the necessary funds to facilitate this transaction. The primary purpose is to ensure that the business can continue operating smoothly without financial strain, while also providing fair compensation to the affected shareholder's family.

1. Policy Ownership: Typically, the business itself or the individual shareholders own the insurance policies. There are two main types of buy-sell agreements: cross-purchase and entity-purchase.
   
   • Cross-Purchase Agreement: Each shareholder buys a policy on the life of the other shareholders. Upon the death or disability of a shareholder, the surviving shareholders use the insurance proceeds to buy the deceased or disabled shareholder's shares.
   • Entity-Purchase Agreement: The business purchases insurance policies on each shareholder. The company itself buys back the shares using the insurance proceeds.
2. Valuation of Shares: The buy-sell agreement should include a method for valuing the shares. This ensures that the insurance payout is sufficient to cover the fair market value of the shares, providing adequate compensation to the deceased or disabled shareholder's family.
   
3. Triggering Events: The agreement outlines specific events that trigger the buy-sell provision, such as death, permanent disability, retirement, or a shareholder's desire to sell their shares.
   
4. Payment and Transfer: Upon the occurrence of a triggering event, the insurance policy pays out the agreed-upon amount. The surviving shareholders or the business then use these funds to purchase the shares, which are transferred to them or the company.

Find out more about Buy-Sell Insurance here.