Shareholders’ agreement – minority shareholder perspective
Minority shareholder protection case study
Our client was planning to invest in a small construction company and become a minority shareholder, along with two other investors. The company had one shareholder at the time and there was no shareholders agreement in place.
Negotiating a position to avoid disputes
A minority shareholder stands in a better position if issues are negotiated and agreed at the point when the shares are acquired, before disputes arise. Minority shareholder disputes may arise if the necessary protections are not put in place in the articles of association and shareholders’ agreement.
Our client was not interested in being involved in the management of the company and becoming a director. Nevertheless, we advised that they may well negotiate the right to appoint a director or at least increase their control over the board’s decisions.
Drafting key minority shareholder protection clauses
To achieve this, we drafted provisions requiring the board to obtain the minority shareholder’s consent on certain matters.
Actions requiring our client’s consent
As a result of our provisions, the board had to acquire our client’s consent to change the company’s articles of association in the future. If they wanted to seek further funding rounds, resulting in the dilution of our client’s minority shareholding, they would also need our client’s approval. Likewise, if the company sought to either increase or decrease the company’s issued share capital.
The company also required our client’s approval for certain financial actions, such as borrowing above a certain level; declaring dividends; entering into transactions above a certain level of value; and finally, adopting their annual business plan.
Right to receive company information
We included other key provisions to enhance the minority shareholders’ position. These included the right to inspect board minutes and resolutions and the right to receive quarterly financial reports. We also drafted Tag Along Provisions
Tag Along Provisions
These are useful to protect minority shareholders in case of change of control.
Under a “tag along” provision, a majority shareholder or shareholders acting together, cannot sell their shares to a third party. That is, unless the third-party buyer offers to buy the shares of the other shareholders at the same price.
I approached Gannons as a minority shareholder looking to protect my position. I found the team commercially minded, quick, efficient and creative.