A shareholders agreement is an agreement amongst the shareholders of a company, to; govern and regulate the relationship between shareholders and the management of a company. It spells out how the shares of the company will be acquired and/or transferred/transmitted and how a shareholder will be protected. It can also be said to be an optional document that creates a contractual obligation between shareholders of a company.

 Generally, according to law, the relationship between the shareholders of a company is governed by the Articles of Association. However, because of the enormous benefits inherent in having a shareholders agreement, a lot of companies decide to supplement the provisions of the Articles of Association with a shareholders agreement.

 A shareholders agreement changes the dynamics among the shareholders of a company from that which exists under basic corporate law. For instance, pursuant to a shareholders' agreement, the minority shareholders of a company are conferred with rights and powers they would not otherwise possess as minority shareholders. Consequently, the majority should appreciate the fact that their powers as the majority could be effectively lost under certain circumstances, for example, if they intentionally allow the board of directors to be purportedly composed of a majority of persons who do not comprise the majority of shareholders.

 The Importance of Shareholders Agreement:

 Shareholders agreements are often used as a safeguard to grant protection to shareholders, because (among other things) it provides adequate safeguards when ‘things go wrong’ under foreseen and unforeseen circumstances. An agreement can provide for many eventualities including the financing of the company, the management of the company, the dividends policy, the procedure for transfer of shares, resolution of deadlock situations and valuation of the shares.

 The absence of a shareholders agreement gives room for floodgates of disputes and disagreements between the shareholders which fill up court dockets and drag on for years consuming valuable resources. Shareholders agreements contain provisions that prevent disagreements and set out the appropriate ways and mechanisms for amicable dispute settlement. Too many times, people set up companies with friends and relatives and do not deem it necessary or expedient to have a shareholders' agreement to protect their interests in the company until it is too late. The articles of association of a company may not afford a shareholder full or adequate protection, hence the need for a shareholders' agreement.

 The reason for a shareholders agreement is to protect a shareholders investment in a company, establish fair and equitable relationships among the shareholders and to govern as well as dictate how the company is managed.

 Shareholders agreements differ from company bylaws or codes of conduct. While bylaws are necessary and outline the governance of the company’s operations, a shareholder agreement is optional. This document is often made by and for shareholders, outlining certain rights and obligations. It can be most helpful when a corporation has a small number of active shareholders.

 The Benefits of a Shareholders Agreement

1.       Minority Protection: A minority shareholder in a private company is a particularly vulnerable person. Therefore, shareholders agreement make provisions for the protection of minority shareholders (i.e. any person(s) with less than 50% of the issued share capital in the company) or those with equal shareholdings (i.e. 2 shareholders holding 50% each of the shareholding or a company with 3 shareholders who cumulatively hold 1/3 of the shares each). This is due to the tendency for private companies to have fewer shareholders than public companies. The implication of the foregoing is that it will be more likely for the control of the company to be held by one or two persons which goes against the tenets of good corporate governance. Generally, there is  little market for the shares of a private company, and a shareholder who is unhappy or unsatisfied with the way a company is being run does not have the option of selling or disposing of those shares quickly. The concentration of control in one or two shareholders as is the case in most private companies can lead to abuse of power, even where no single shareholder holds a majority.

 There are now remedies provided for in the Companies and Allied Matters Act, which aim to prevent such unfair conducts towards a minority shareholder. That notwithstanding, these remedies can prove extremely costly, thus, it is far better to prevent the situation from arising in the first place. This is where a shareholders agreement becomes useful and necessary.

 2.       Confidentiality: A Company's Articles of Association  is part of the incorporation documents of a company and is a public document in Nigeria. The shareholders agreement on the other hand is a private contract between the shareholders and as such is governed by the laws of confidentiality between the parties (shareholders).

 3.       Alteration: The process of amending the Articles of Association of a company is rigid, and such a change needs to be communicated to and approved by the Corporate Affairs Commission (CAC). However, altering the shareholders agreement is cheaper, less formal, and more flexible than the Articles of Association.

 4.  Flexibility: The shareholders are at liberty to construe the agreement based on the kind of relationship they intend. The shareholders agreement provides better protection for minority shareholders that hold interest in certain classes of shares which would not ordinarily be afforded to that class of shareholders. In this vein, they can include clauses, which protect the interest of the holders of such class. Similarly, provisions can be inserted to resolve any deadlock between shareholders. This will be particularly important where the shareholding arrangement in a company is 50/50 between two shareholders. The shareholders agreement can provide options for the shareholders where a deadlock exists on a major company decision.

 5.       Management: The shareholders agreement can be tailored to suit the company's needs. It may set out the detailed structure of the company, the day-to-day operations of the company, the number of directors, and the remuneration for the directors. The agreement can be as simple or as detailed as the shareholders desire or intend.

 CONTENTS OF A SHAREHOLDERS AGREEMENT:

The following among others form the content of the shareholders agreement:

 1.      Date of Agreement

2.      Identification of Parties

3.      Recitals

4.      Interpretation

5.      Representations

6.      Scope and Nature of Shareholders’ Relationship;

7.      Conduct of the Affairs of the Company

8.      Financing

9.      Restrictions on Transfer/Right of First Refusal

10. Dispute Resolution/Compulsory Buy-out (“Shotgun” Clause)

11. Obligation to Join in a Sale (“Drag-along”) and Piggy-back Rights

12. Obligation to Purchase/Obligation to Sell;

13. Indemnification and Discharge of Guarantees

14. Insurance Policies

15. Sale on Death/cross-option agreement

16. Alter Ego Trust

17. Default

18. Family Law Considerations

19. Miscellaneous and General Provisions

CONCLUSION

The advantages of entering into a shareholders agreement as discussed above are enormous and should not be overlooked by shareholders and management alike. In this regard, shareholders are encouraged to enter into shareholders agreements in order to secure their interests as well as that of the company.

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