3 Key Considerations in Forming a New Shareholders’ Agreement.
When a company sells its shares to new shareholders, a shareholders’ agreement will have to be drafted and when a shareholder sells their shares to another person(s) then a share purchase agreement will have to be drafted to reflect the transaction.
In both instances, the existing and new shareholders will have to negotiate to protect their rights. The following are 3 key considerations that affect all parties involved:
1. As an original shareholder to a corporation, you will want to consider having the right of first refusal in the event any incoming shareholders want to sell their shares. Not ensuring this may leave you with new unknown shareholders in your company.
2. Creating a new class of shares such as preferred shares, may lead to conferring new shareholders extra rights that a shareholder with common shares may not have. For example, generally preferred shares are paid first in the event of a liquidation.
3. The company’s Article of Association must conform to the new Shareholders’ Agreement. The existing Articles of Association should give you the right to create a new class of shares (i.e. preferred shares or class A, B, C, etc.). otherwise doing this without conforming to the AoA will render the decision void for being ultra vires (“beyond your powers”). Depending on the rights provided to the new shareholders, you may also have to amend the Articles of Association to take into consideration differing voting rights and procedures.
Although bringing new shareholders into a company may be a beneficial strategic move for any company, you should consult an experienced corporate lawyer to ensure you understand how your rights may be affected and to draft a shareholder’s agreement that everyone is content with.
At EAG Law Firm, we work closely with our clients to ensure their rights are protected. We provide legal advice tailored to your specific circumstances. Whether you are purchasing shares or selling your shares, to learn more about how you can further protect your rights please contact us at email@example.com