Shareholders Agreement 101: Amending the Agreement (Part 9/10)

Shareholder’s agreement is a contract that is legally binding to the shareholders of a company. It includes provisions that direct the operation of the company, the conditions, and terms for shareholders, their rights and obligation, and the procedure for shareholder’s meetings. While the agreement is drafted with the intention to address the requirements of the company and its shareholders, it may fail to manage everything.  Sometimes the document may require an amendment.  

 Amendments to a document can occur for various reasons. Companies need to receive consent from their shareholders before moving forward with the proposed change in their shareholder’s agreement.

Why amend shareholder agreements?

A shareholder’s agreement is drafted to meet the demands of the business and allow coherence in practice amongst its shareholders. Its purpose is catered towards regulating the activities of the firm and serving the interests of its shareholders. However, the agreement may not always address the changes that arrive with the expansion and growth of the business. Therefore, it needs to adapt to the changes to fulfill its objectives. Amending a Shareholder’s document can be necessary for the following reasons:  

The exit of a shareholder:

Unforeseen circumstances like the COVID-19 pandemic, external events, damage in work relationships, etc can trigger a shareholder to exit a firm. Especially in circumstances when the shareholder was key to founding the business, this exit might create a necessity to amend. Changes in personal circumstances, an external event such as Covid-19, or a breakdown in working relationships can result in a shareholder wishing to exit the business. Such exits might create a necessity to amend the shareholder’s document. In circumstances where the negotiated terms of the exit need to be changed the shareholder’s agreement might be amended.

An existing shareholder might wish to acquire more shareholding in the company. However, the ongoing terms in the shareholder’s agreement might prevent them from doing so. When the company requires investment the shareholder’s agreement might be amended to allow shareholders to acquire more stocks. 

An agreement may or may not include the terms required for the removal of the board of directors. In the event the board of director are not acting in the best interest of the company and the provisions of the shareholder’s agreement prevent the removal, the agreement may be amended

To welcome external investors:

If your company is considering expansion and lacks funds welcoming external investment might be the best option. Certain shareholder agreements prevent companies from doing so. I shareholders agreement might contain provisions that prevent the dilution of minority shareholders. It may also exclude tag-along rights preventing the trade of a large share. And set circumstances amending the shareholder’s agreement will create a space for the company to welcome external Investments.

To amend shareholder’s rights to income:

Sometimes a business might require reinvestment to expand or sustain. This prevents the shareholders from accessing their share of dividends from profits.  If the shareholder’s agreement requires the firm to distribute dividends to the shareholders from its profit while the company requires Investments then the agreement must be amended.

To plan a succession

Some companies have directors and shareholders that are multi-generational. The holder is a purchasing retirement it is advisable for the company and the show holder to create a plan for the voluntary transfer of shares. Likewise, if any shareholder were to have a premature death, their shares would have to be mandatorily sold.

Unforeseen circumstances

A shareholder’s agreement may not always address the unforeseen circumstances that may arise. A shareholder may have to seek exit or retire due to an illness. As an agreement cannot always anticipate every situation, sometimes, the agreement needs to be amended to deal with an issue on hand.  

Changes in decision making

Any decision made for the company might change its trajectory. The methods shareholders use to make decisions and the type of corporate challenges create changes to the firm’s strategies. This might shift or evolve the company’s objectives, creating a need for amendment.  

Resolution of disputes

Shareholder agreements are used frequently when shareholders have a conflict of interest leading to a dispute. Since the agreement is vital to dispute resolution between shareholders, the company should update its dispute resolution clauses. This may sometimes require amendment of the agreement. 

Process of amending shareholder agreement

The process to amend a shareholder’s agreement is fairly simple. Provisions in a shareholder’s agreement can be amended by simply having the shareholders agree to the terms of the amendment in writing. Shareholders do not need to sign an entirely new agreement to make an amendment. They can simply sign a deed of variation. The deed of variation is a document that sets new changes to the shareholder’s agreement. After the deed has been signed by all the shareholders, the changes are included in the shareholder’s agreement.  

Conclusion

A firm can have multiple reasons to amend a shareholder’s agreement. Prior to making any changes to the shareholder’s agreement, the parties should ensure that the amendments are appropriate. Shareholders need to agree to the changes within the agreement. The process of amendment can only go forward if shareholders express their willingness in writing. This is done through a document known as a deed of variation.  

You may also like:

• Shareholders Agreement 101: Rights and Responsibilities(Part 1 of 10)
• Shareholders Agreement 101: Terms and Conditions of Transferring Shares(Part 2 of 10)
• Shareholders Agreement 101: Resolving Disputes Among Shareholders (Part 3 of 10)
• Shareholders Agreement 101: Defining The Voting Rights of Shareholders (Part 4 of 10)
• Shareholders Agreement 101: The Roles and Responsibilities of the Board of Directors (Part 5 of 10)
• Shareholders Agreement 101: The terms and conditions of issuing new shares in a company(Part 6 of 10)
• Shareholders Agreement 101: The procedures of holding shareholder meetings and voting on company matters(Part 7 of 10)
• Shareholders Agreement 101: Shareholder Financial Info Rights (Part 8/10)