Shareholders Agreement: equal 50/50 shareholders

Shareholders Agreement: equal 50/50 shareholders

Shareholders Agreement between two equal shareholders

Background

Equal shareholders in a company should consider having a shareholders agreement to regulate the management of the company and their relationship as shareholders in the company.

Their agreement should reflect the usual matters covered by a shareholders agreement but in a manner which reflects their equal ownership and joint control of decision-making.  

As equal owners of the business, provisions concerning control and management of the company should apply equally for the benefit of both shareholders.  As such, they should not be a matter of argument or dispute between the two equal shareholders (in the absence of other circumstances).

How should a shareholder deadlock be managed?

Being equal owners in the business usually results in each shareholder having the inherent protection that its consent is required for major decisions and other matters.  However, neither shareholder usually has a majority or casting vote.  This creates the risk of a deadlock situation arising if the shareholders are unable to agree on a particular matter or course of action.  This disagreement can relate to important material matters but could also apply to less important or trivial decisions which the company may need to take in its day to day business operations.

Shareholders often want the shareholders agreement to contain a mechanism for resolving a potential future deadlock between them.  

Potential mechanisms include:

• Defining (and limiting) which matters may give rise to a deadlock if they are not jointly approved.
• One or more occasions for the potential deadlock matter to be discussed and considered by the shareholders (either as shareholders or directors) before a deadlock will be considered to have arisen,
• A cooling-off period before the deadlock mechanism can be triggered
• Referral of the deadlock matter to the senior management of the shareholders (if the shareholders are companies) and/or an independent third party or mediator
• A share buyout clause (known as a “Russian roulette” clause).  
• If the deadlock remains unresolved for a period of time, the compulsory sale (after a marketing process) or liquidation of the company

When negotiating a deadlock mechanism, it is important to bear in mind that the deadlock mechanism will apply equally to both parties as shareholders,  In the case of a Russian roulette clause, either shareholder may find itself in the position of having to decide whether it is the party which triggers the process by stating the share price or the party which has to elect whether to buy or sell at the stated price.  

Often, having considered the alternatives, parties decide not to include any specific provisions to deal with a deadlock.

What is a Russian roulette clause?

After a defined deadlock situation has arisen and remains unresolved, one shareholder has the right with a specified period to service notice on the other shareholder stating a specified cash price at which it is willing either to buy the other shareholder’s shares or to sell its own shares to the other shareholder.  

The other shareholder must then elect either to sell its shares or to purchase the first shareholder’s shares at the stated price.  

Once triggered, the process cannot usually be stopped unless both parties agree to do so.

The deadlock is resolved by the share sale and purchase, resulting in one of the shareholders being the sole owner of all of the shares in the company.

About this Shareholders Agreement

This agreement is a shareholders agreement between two equal shareholders in a private limited company.

Document features

Features include:

• Full form shareholders agreement between two equal shareholders
• Each shareholder to hold an equal number of separate classes of share
• Clauses relating to the following matters:
  • Business of the company
  • Shareholder roles and services
  • Shareholdings
  • Funding
  • Director appointment rights and board decision-making
  • Shareholder decision-making
  • Rights to dividends
  • Matters requiring prior approval of specified shareholders (reserved matters)
  • Future share issues
  • Transfers of shares
  • Shareholder information rights
  • Shareholder restrictive covenants
  • Duration and termination

Explanatory guidance

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