Starting a company with someone you trust can seem straightforward, whether it’s a long-time friend, relative, or colleague. You align on the business idea, divide responsibilities, and incorporate the company. At that stage, many business owners believe the difficult part is behind them, when it is only the beginning.

What is often overlooked is that a company’s incorporation documents, namely its Articles of Incorporation, may not regulate the relationship between shareholders in sufficient detail. For instance, the Articles of Incorporation may not adequately address how decision-making, disagreements, expectations, or unforeseen circumstances will be managed. This is where a Shareholders’ Agreement becomes essential.

What Is a Shareholders’ Agreement?

A Shareholders’ Agreement is a legally binding contract between a company’s shareholders that sets out how key decisions will be made with respect to the company and the rights and obligations of the shareholders.

Key Clauses in a Shareholders’ Agreement

A Shareholders’ Agreement should directly address the most common areas of potential conflict in a business in order to safeguard the shareholders’ interests. A few key clauses in a Shareholders’ Agreement include:

i) Shares Ownership and Transfers

The agreement should clearly outline ownership percentage held by each shareholder and may also include provisions governing the transfer of shares. For example, it may provide that no shareholder can transfer their shares to a third party without first notifying the existing shareholders. Existing shareholders may then be given the opportunity, within a specified period, to purchase the shares before they are offered to any third parties. This can also prevent shareholders from bringing in unwanted third parties.

ii) Anti-Dilution

Anti-dilution provisions are designed to protect existing shareholders from dilution of their shareholding arising from certain actions, such as the issuance of additional shares. These provisions may grant existing shareholders, such as the founders and key shareholders of the company, the right to purchase a proportionate number of the newly issued shares on the same terms and conditions offered to the incoming shareholder. This enables them to maintain their ownership percentage in the company. Without anti-dilution protection, a founder who owns 40 per cent of a company could see their ownership reduced significantly if new shares are issued to investors.

iii) Decision-Making and Control

The agreement typically sets out the decisions that require prior shareholder approval to prevent major decisions from being made without their knowledge or consent. Examples include amending the Articles of Incorporation, issuing or allotting shares, incurring borrowings or capital expenditures above a specified amount, and changing the company’s name. The agreement may also require shareholder approval for matters that would otherwise fall within the authority of the board of directors.

iv) Profit Distribution

The Shareholders’ Agreement may specify the details of the company’s dividend policy, providing clear guidance on the shareholders’ expectations regarding profit distribution. For instance, the agreement may specify that the company shall seek to pay not less than 5 per cent of its distributable profits as dividends. It may also address the requirement for the company to maintain adequate capital and reserves to support its operations. This can be especially important when some shareholders expect regular dividends while others prefer reinvesting profits into growth.

v) Consistency with the Company’s Articles of Incorporation

A Shareholders’ Agreement will often include provisions requiring the company’s Articles of Incorporation to be amended so they are consistent with the terms of the Agreement. The Agreement may also specify that, in the event of a conflict, the Shareholders’ Agreement will prevail. Some shareholders may prefer not to amend the company’s Articles of Incorporation if they wish to keep certain terms private, since the Articles filed with the Companies Office are publicly accessible.

Why Shareholders’ Agreements Matter for Small Businesses

There is a common misconception that Shareholders’ Agreements are only necessary for large companies. In reality, small and medium-sized businesses may need them even more. In smaller companies, with fewer shareholders, conflicts can have a greater impact and limited financial resources provide less capacity to manage prolonged disputes. This makes clear rules and expectations essential to protecting both the business and its owners.

A Shareholders’ Agreement is not about anticipating the worst from your business partners, it is about clarity. By setting expectations early, shareholders can reduce disputes, protect the business, and focus on growth. For many Jamaican businesses, especially family-owned and closely held companies, it can be one of the most important legal safeguards put in place from the very beginning.

Rachel Poole is an associate at Myers, Fletcher and Gordon and a member of the firm’s Commercial Department. She may be contacted at rachel.poole@mfg.com.jm or through the firm’s website www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.