The MOI of the company can be described as its ‘constitution’ setting out the rights, duties and responsibilities of shareholders, directors, and others in the company, and in relation to the company, amongst other things. A company cannot be registered without an MOI.
The Shareholders’ Agreement is the document regulating the relationship of the shareholders to each other. It is not a formal pre-requisite to registration of a company, but it is advisable to enter into one with your fellow shareholders.
The benefits of shareholders entering into a Shareholders’ Agreement with each other cannot be overstated.
As any experienced business person will know, an agreement entered into before a dispute occurs can substantially reduce the misunderstandings and disagreements that can arise out of that dispute.
In fact an agreement can often prevent a misunderstanding, and will go a long way to setting the boundaries and laying the foundation for the relationship between the parties to it, and paradoxically the very existence of the breach provisions of a carefully considered and well drafted agreement can prevent it ever being resorted to.
In addition, the Companies Act of 2008 does not restrict pre-emptive rights, ‘tag along’ or deemed sales and such clauses pertaining to the rights of shareholders between each other relating to sales or disposal of shares. The Shareholders Agreement is ideal for being able to record these.
COME ALONG AND TAG ALONG
Amongst the many important clauses in a shareholders agreement, the ‘Come Along’ clause and the ‘Tag Along’ clause are discussed below.
Tag Along:
This clause provides that if a shareholder offers to sell a specified percentage of the shares in the company to a third party, such shareholder must procure that the third party makes the same pro rata offer to acquire the shares of the remaining Shareholders.
This can be made subject to the pre-emptive rights process which should be provided for in the Shareholders’ Agreement as well, and ensures that remaining shareholders always have the opportunity of being able to purchase the shareholding on offer.
The rationale for this is that where one of the parties is a minority shareholder, his or her position is protected where the majority shareholder decides to sell a defined percentage of shares in the company.
It gives the minority shareholder the right to tag along with the sale, i.e. to sell his or her shares to the same purchaser on the same terms and conditions. This prevents a minority shareholder from being stranded with an outside investor and with little or no effective control over the company.
Think about your current arrangement in practical terms, and try and imagine what you would feel in the event of a takeover, and would you be happy be a shareholder if the other shareholders were not known to you?
Come Along: (also referred to as ‘Drag Along’)
The provisions of a clause like this provide that if the majority shareholder sells his stake, and the third party buying the shares wishes to acquire the remaining shares in the company, minority holders are forced to join the deal.
This clause protects majority shareholders, and gives the majority shareholder the right to force the other shareholder(s) to exit should the majority shareholder exit, once again, usually on the same price and terms.
This can also be made subject to the pre-emptive rights process being followed, depending on the particular set of circumstances pertaining to the company.
The rationale behind this is to give the majority shareholder the right to negotiate a sale on terms acceptable to himself /herself, leaving other shareholders with no voice at all.
It also prevents a minority shareholder from frustrating the wishes of the majority.