What is a deed of adherence to a shareholders agreement?
By Joanne Hue, Updated: 2023-03-22 (published on 2023-01-09)
A shareholders agreement is a contractual agreement that binds all the shareholders to the terms of the company. It helps to ensure that all shareholders are treated fairly. On the other hand, if a new shareholder is to join a company, a deed of adherence is used to bind them to the terms of the existing shareholder’s agreement. It is also synonymously called a Deed of Ascension. Although it sounds quite simple, there is much more to this than just signing a contract. Let’s dive deeper into how new shareholders are actually bound with the shareholder’s agreement through the deed of adherence.
Shareholders’ Agreements & Deeds of Adherence
You can understand a Shareholder’s agreement as simply a contract between shareholders that specifies how a business should be run. It defines the rights and obligations of shareholders. A shareholder’s agreement provides Information concerning the management of the business and protection available for the shareholders.
The primary objective of a shareholders’ agreement is to provide a guarantee to shareholders that they will receive equitable treatment in the company and that their privileges will be secured. Excerpts of the agreement specify the authentic and equitable prices of the share. Additionally, it grants shareholders the power to decide upon outside parties that may hold shares in the future.
In order to add to existing shareholders you need a deed of adherence. A deed of Adherence is a legal document that is required when a business already has existing shareholders. A deed of Adherence can only be used when a business already has an existing shareholders agreement. When a accompany has a pre-existing shareholders’ agreement, a deed of adherence can be used to bind parties to it.
Does your Shareholders’ Agreement let you add members using a deed of adherence?
Yes, a shareholders’ agreement permits the addition of members using the deed of adherence. In fact, the objective of a deed of adherence document is to prevent the creation of a new shareholders’ agreement with the addition of each new shareholder. A deed of Adherence allows the addition of newer shareholders without the need of creating a new shareholder’s agreement and binds new shareholders to the shareholder’s agreement.
Usign a deed of adherence is quite practical. It saves the trouble of having to draft an entirely new shareholder agreement all together. It automatically binds the new shareholder to the terms of the existing Shareholders Agreement upon signing. Therefore, prior to committing to a company, you should read its shareholder’s agreement first, so you are sure about moving ahead with your decision to invest and to understand your role and responsibilities.
What information does the Deed of Adherence need to add new members?
A deed of Adherence is a relatively simple document. Usually, it is present in form of a deed poll. Here, only the signature of the shareholder is required. There might be some instances where the signature of the company is also needed.
A deed of adherence records the parties between which the agreement is signed. It identifies whether a shareholder is an individual or a company. If it is an individual, it requires information about the individual and their signature. Sometimes, a witness may also be required. If the shareholder is a company, then the company’s director is expected to sign the deed of agreement.
What procedure do you need to follow to execute a deed of adherence?
In order to execute the deed of adherence, the signature of the new investor is mandatorily required. It should outline the number of shares and their price. After the signature is done, the investor should make the payment. The payment is the initial subscription money that can be paid directly to the company’s bank account. The payment can also be done in an escrow account within the agreed date.
The investor must thereafter, if they haven’t already, return the deed of adherence and the signed share subscription letter. Finally, the company needs to authorize the new investor, provide them with shares and share certificates, and update their information with ASIC.
How long does it take to add someone to a shareholders’ agreement?
The decision of the shareholder will determine the addition of new parties to the shareholder agreement. New shareholders may then ratify the shareholders’ agreement under deed agreements. The shareholders, however, have the freedom to draft an alternative shareholders’ agreement if a new shareholder is unwilling to comply with the conditions of the existing shareholders’ agreement. In the situation they don’t comply, the party that refused to sign the adherence document would most likely be excluded from the shareholders’ agreement. However, they can be swiftly added to the shareholders’ agreement provided they readily accept the provisions of the deed agreement. As a result, the time that is required to add someone to the shareholders’ agreement depends on the new shareholder’s agreement to the conditions.
How to remove users from a shareholders’ agreement?
Removing users from a shareholder agreement could be a lengthy process because it requires agreement from the majority shareholders. The removal can be done through the following steps:
- 1. Refer to the agreement of shareholders:
Shareholders of the company are subject to terms and conditions set by the company. This means that the shareholder’s agreement applies to all the shareholders. The shareholders of the company create the shareholder’s agreement. Therefore, it ensures that all shareholders are represented fairly. Referring to this agreement is helpful and necessary to break off a contract with a shareholder. You may also refer to the arrangement of shareholders to identify reasons for the removal of the shareholder. It can also be a basis for negotiation.
- 2. Seek Legal Consultation
To prevent legal problems, guidance should be sought. Caution should be employed especially before taking any action without shareholder permission. Legal consultation is an intrinsic part of the process because despite seeming simple, it holds many intricacies.
- 3. Claim majority amongst the shareholders
A majority that is required for the removal of a shareholder needs to be overwhelming. This means you may not be able to remove a shareholder with a simple majority of fifty percent. You will require at least 75% of shareholders’ favor for the removal. The shareholder should have less than 25% of the shareholders in their favor. The process of dismissing a shareholder can be done through a vote.
- 4. Negotiate for the majority:
Sometimes you may not find a legal cause to remove a shareholder. In this case, the best option is to negotiate the majority in your favour. The majority opinion is indecisive in making any decision for the company. Therefore, if you do not already have the majority on your side negotiation is the best option to acquire it.
- 5. Create a non-compete agreement:
Even after you have succeeded to secure the majority, you need to proceed with great caution. As the process can be complicated and troublesome, you would want to impose a non-compete agreement on the shareholders that will be departed. It is the final step in the removal of the shareholder. A non-compete agreement will ensure that the departing shareholder will not participate in a business that is a direct competition to your company. However, the non-compete agreement is only applicable for a set amount of days.