How are decisions made with a Shareholder Agreement?

A shareholder agreement is usually structured so that decisions go something like this:

How each business decides to structure its decision making process is really up to them. The beauty of a Shareholder Agreement is that it is a contract between people, and can be altered and tailored to fit each business. If you really wanted to, you could write into your Shareholder Agreement that if a Director wants to change the budget for a quarter, he has to do an interpretive dance before the change is approved by the Board of directors.

Here’s a slightly more practical example of how a decision structure might work with the help of a Shareholder Agreement.

The managers of a pizza restaurant want to expand the restaurant - the shop next to them has become vacant and they want to take it over to put up more tables and maybe a dessert bar. To do that, they’re going to need some money - say $10,000 for the extra tables and fit out, and another $100,000 to buy the empty shop next door.

The Shareholder Agreement states that expenses which are $5,000 or more need Simple Majority approval of the Board, and any expenses over $90,000 need Special Majority Shareholder approval (at least 75% or more). Using the legal language you normally see in agreements, any decision is usually called a 'resolution' and the directors or shareholders 'pass a resolution' or 'resolve to do X Y Z'.

So for the fit out of $10,000, the Board of Directors can either:

  1. set up a time and have a meeting; or
  2. sign a 'circular resolution' (essentially getting written approval),

to 'resolve' to approve the expense. Only 50% or more of the Directors will need to agree for a simple majority. Be careful though, because in some Shareholder Agreements each Director has the number of votes equivalent to his appointing Shareholder. For example, a Director appointed by a Shareholder which owns 30 out of 100 shares in a company will get a vote which is equal to 30%.

Same thing applies for the new store of $100,000 - the Shareholders can either meet in person or pass a circular resolution to resolve to approve the expense and the purchase. This time, the shareholders which hold at least 75% of the issued shares (which have a right to vote) will need to agree.

So things are all peachy when everyone agrees with a decision. But what happens when there are disagreements between directors or between shareholders? Check out our page on resolving disputes in a company.