“They criticize me for harping on the obvious; if all the folks in the United States would do the few simple things they know they ought to do, most of our big problems would take care of themselves.” Calvin Coolidge
A shareholders’ agreement (“SHA”) as the name implies is an agreement between shareholders. The practice in Nigeria is for this agreement to be entered into as a pre-incorporation or a post-incorporation contract. Plainly speaking, every time two or more persons agree to incorporate a company, a SHA is born, albeit oral. As obvious as its relevance appears to be, many shareholders proceed to incorporate companies with their partners without reducing terms into writing and ne'er a SHA. On the assumption that the memorandum and articles of association (M & A) sufficiently protects their interest, shareholders proceed to execute more complex documents with third parties, even while the company has no code guiding the shareholders’ business relations. Thus, a very common cause of action in various Nigerian courts is the breach of oral pre- incorporation contracts amongst shareholders. Unfortunately for many, with nothing more than the M & A, they are forced to compensate their fellow shareholders who may have contributed nothing beyond their signature at the time of the company registration.
In the past, lawyers would populate the M & A with as many provisions as would ensure that interests of the subscribers to the M & A were protected. However, the Corporate Affairs Commission has since stopped receiving bulky M & A for registration. As such, the SHA becomes a veritable tool to protect each shareholder’s business interest within the company and to regulate the company’s dealings with third parties.
A good SHA should be executed by, and between the shareholders and should name the company as a party. Matters relating to consideration, obligations of parties, transfer of shares, pre-emption rights, dividend policy, fair value, tag along drag along provisions and voting should be clearly dealt with and provided for. The SHA can also be used to amplify information contained in the M & A.
Clearly, the SHA is particularly useful to small companies, unquoted companies, companies set up as special purpose vehicles and companies whose shareholders generally revolve around a definite circle. It is therefore pertinent that every shareholder protects its business interest today by executing a Shareholders’ Agreement.
Senior Associate at Streamsowers & Kohn
Eberechi May Okoh is a highly motivated lawyer with over ten years hands on experience spanning litigation and commercial law practice.
Ed's Note - This article was originally published here.