From minority shareholder rights to share valuations and dispute resolution, understanding the role of a shareholders' agreement can help accountants advise business owners before disagreements become costly.
When a company has more than one shareholder, a shareholders' agreement can be one of its most important documents.
Yet agreements are often overlooked when businesses are established. Founders may be focused on funding, operations and keeping initial costs under control. The possibility of a future dispute can seem remote.
The difficulty arises when shareholders disagree about the direction of the business, management decisions or the value of their shares.
In the webinar, Update on Shareholders Agreements, Disputes and Remedies, solicitor Sean Nolan examined how Irish company law deals with these situations.
Drawing on his experience advising companies and resolving shareholder disputes, he highlighted a practical lesson: it is considerably easier to agree the rules while shareholders are working together than to negotiate them after relationships have broken down.
For accountants advising owner-managed businesses, this is an important conversation to have early.
Watch the CPDStore webinar: Update on Shareholders Agreements, Disputes and Remedies
1. What happens when a company has no shareholders' agreement?
Without a shareholders' agreement, shareholders must rely on the company's constitution, applicable company law and any other enforceable arrangements governing their relationship.
In Ireland, the Companies Act 2014 provides the principal statutory framework.
Section 158 addresses the directors' authority to manage the company, subject to the relevant statutory and constitutional provisions.
However, the interests of directors and shareholders do not always align.
A shareholder may also be a director, employee or founder. When disagreements arise, those overlapping roles can complicate matters.
During the webinar, Nolan described a dispute involving the founders of a business valued at approximately €20 million.
Although the founders had prepared heads of agreement and intended to establish a shareholders' agreement, the formal agreement was never completed.
A dispute subsequently arose. A negotiated settlement was achieved, but the absence of an agreement made the situation more difficult to resolve.
The example illustrates why advisers should not treat a shareholders' agreement as an administrative afterthought.
Practical takeaway for accountants: When advising on the incorporation of a company with multiple shareholders, raise the question of a shareholders' agreement and recommend appropriate legal advice.
2. What protection do minority shareholders have under Irish company law?
A minority shareholding does not automatically prevent a shareholder from challenging decisions affecting their interests.
However, there is an important distinction between a disagreement with management and conduct that provides grounds for legal action.
One of the principal remedies discussed during the webinar was Section 212 of the Companies Act 2014.
This provision addresses circumstances where a company's affairs are conducted in a manner that is oppressive to a member or disregards their interests.
A shareholder who establishes the relevant grounds may seek relief from the court.
Sean Nolan also examined the general principle associated with Foss v Harbottle: where a wrong is committed against a company, the company itself is generally the appropriate party to pursue a remedy.
Exceptions and statutory remedies may apply, particularly where minority shareholders have suffered conduct that cannot properly be addressed through majority control.
For accountants, the key distinction is between a commercial disagreement and a dispute that may involve breaches of legal duties or shareholder rights.
Practical takeaway: If a minority shareholder raises concerns about exclusion from management, financial decisions or treatment by other shareholders, recommend legal advice rather than assuming majority control settles the issue.
3. Why share valuation can become contentious during a dispute
Share valuation is particularly relevant to accountants involved in shareholder exits and business restructurings.
When one shareholder wants to leave a company, a fundamental question arises: how much should their shares be worth?
The answer is not always straightforward.
During the webinar, Sean Nolan discussed valuation approaches including earnings-based methods, such as EBITDA, and net asset value.
He also highlighted the potential importance of applying a minority shareholding discount.
Where a shareholder holds a non-controlling interest, the question of whether a discount should apply can materially affect the proposed buyout price.
There is no universal answer that applies to every dispute.
The appropriate valuation basis depends on the circumstances, including any existing contractual arrangements and the relevant legal context.
A properly drafted shareholders' agreement can address these questions in advance by establishing an agreed valuation process.
This may include a mechanism for appointing an independent expert when shareholders cannot agree.
Practical takeaway: When undertaking a share valuation during a shareholder dispute, clarify the valuation basis, any proposed minority discount and the contractual framework before proceeding.
4. How a shareholders' agreement can prevent deadlock
Shareholder disputes do not always involve wrongdoing. Sometimes, business owners simply cannot agree on the company's future direction.
This is particularly challenging where two shareholders have equal voting power.
A disagreement about investment, expansion or management may prevent the company from making important decisions.
Nolan explained that a shareholders' agreement can define what constitutes a deadlock and establish a process for resolving it.
Possible arrangements include:
- Mediation: Appointing an independent mediator to help shareholders reach an agreement.
- Buyout provisions: Establishing circumstances in which one shareholder may acquire another's shares.
- Valuation mechanisms: Agreeing how shares will be valued if an exit becomes necessary.
- Arbitration: Providing for certain disputes to be determined outside court proceedings.
- Expert determination: Referring specific technical matters, such as valuations, to an appropriately qualified independent expert.
These arrangements provide a process for dealing with disagreements before relationships deteriorate further.
For accountants, agreed valuation procedures and independent expert determination can be especially relevant when advising owner-managed companies.
5. What should a shareholders' agreement include?
A well-drafted shareholders' agreement should reflect the ownership structure, commercial objectives and circumstances of the business.
During the webinar, Sean Nolan identified several matters that businesses should consider.
- Key provision
- Why it matters
- Board representation
- Clarifies rights to appoint or nominate directors
- Reserved matters
- Identifies decisions requiring shareholder consent
- Share transfers
- Establishes restrictions and procedures when shares change hands
- Valuation provisions
- Sets out how share prices will be determined
- Dividend policy
- Addresses expectations around profit distributions
- Funding arrangements
- Clarifies future capital contributions and financial commitments
- Shareholder exits
- Establishes procedures when a founder or investor leaves
- Deadlock and disputes
- Provides agreed methods for resolving disagreements
Other provisions may address confidentiality, access to financial information, shareholder service agreements and personal guarantees.
Sean Nolan also emphasised the importance of reserved matters.
These are decisions that require a specified level of shareholder approval rather than being left entirely to ordinary management processes.
For example, shareholders may agree that certain significant transactions require consent from a qualified majority.
This can provide contractual protection for minority shareholders who would otherwise have limited influence over those decisions.
The agreement must be properly drafted and coordinated with the company's constitution and applicable law.
6. What should accountants do when shareholders are already in dispute?
Accountants can find themselves in a difficult position when shareholders disagree.
The accountant may have worked with the business for years and developed relationships with several shareholders.
However, an adviser engaged by the company must be careful not to become aligned with one shareholder group.
During the webinar's Q&A, Sean Nolan highlighted the potential conflicts that can arise when advisers become involved in disputes between shareholders.
He suggested that introducing an appropriately experienced mediator may provide a constructive route towards resolution.
For accountants facing this situation, practical considerations include:
- Establishing who the client is and reviewing the scope of the engagement.
- Identifying potential conflicts of interest before accepting further instructions.
- Considering whether independent legal advice is required.
- Clarifying the scope and assumptions of any requested share valuation.
- Avoiding involvement in shareholder negotiations beyond the adviser's professional remit.
An accountant may have an important role in providing financial information and valuation expertise. That does not mean they should determine the legal rights of the parties.
Frequently asked questions about shareholders' agreements in Ireland
Is a shareholders' agreement legally required in Ireland?
A shareholders' agreement is not generally a mandatory requirement when incorporating an Irish private limited company. However, it can provide important contractual protections that are not necessarily addressed by the company's constitution or general company law.
For businesses with multiple shareholders, an agreement can clarify decision-making rights, share transfers, valuation procedures and dispute resolution arrangements.
In the webinar, Sean Nolan strongly recommended considering an agreement at incorporation, when shareholders are more likely to agree on their respective expectations.
Can shareholders enter into an agreement after a company has been incorporated?
Yes. A shareholders' agreement can be entered into after incorporation, provided the relevant parties agree to its terms.
It is often easier to establish an agreement when a company is formed, before disagreements emerge. However, existing companies can still benefit from reviewing their shareholder arrangements.
An agreement may be particularly useful when ownership changes, new investors join or founders want clearer procedures for managing the business.
The proposed terms should be reviewed by a solicitor to ensure they are appropriate and enforceable.
What can a minority shareholder do if they are being treated unfairly?
In Ireland, Section 212 of the Companies Act 2014 provides a potential remedy where a company's affairs are conducted oppressively or in disregard of a member's interests.
The court may have powers to make orders addressing the conduct, including arrangements concerning the purchase of shares.
However, dissatisfaction with a management decision does not automatically establish oppression. The legal assessment depends on the circumstances and the relevant evidence.
Minority shareholders should obtain legal advice before pursuing proceedings.
How are shares valued when shareholders disagree?
Share valuation depends on the circumstances of the business, the purpose of the valuation and any applicable contractual provisions.
Possible approaches discussed in the webinar included EBITDA-based valuations and net asset value.
A significant consideration is whether a minority shareholding discount should apply. There is no single rule suitable for every situation.
A shareholders' agreement can reduce uncertainty by specifying a valuation procedure and providing for independent expert determination.
Where litigation is involved, the court may determine the appropriate valuation basis.
What happens if two shareholders cannot agree on business decisions?
A shareholder deadlock occurs when shareholders cannot reach the agreement needed to make an important decision.
Where a shareholders' agreement exists, it may provide a defined procedure for resolving the disagreement. This could involve mediation, arbitration or an agreed buyout mechanism.
Without such arrangements, the parties may need to negotiate a resolution or seek legal advice about their available remedies.
The webinar emphasised the value of establishing deadlock procedures before disputes arise.
Can an accountant act for both shareholders during a dispute?
An accountant advising a company must consider potential conflicts of interest when its shareholders are in dispute.
Acting for the company does not automatically mean the accountant can advise individual shareholders on their competing interests.
Where a shareholder buyout is proposed, the accountant should clarify who is instructing them, the scope of the valuation and whether independent advice is necessary.
Sean Nolan highlighted mediation as a possible option for helping shareholders resolve disagreements while allowing the company's adviser to avoid becoming aligned with one side.
The key takeaway for accountants
A shareholders' agreement is not simply a document for solicitors to consider when a business is incorporated.
It can have practical consequences for financial reporting, shareholder valuations, ownership changes and business continuity.
Accountants are often well placed to identify when clients would benefit from reviewing these arrangements.
The central lesson from the webinar is straightforward: raise the subject of a shareholders' agreement before a dispute makes agreement more difficult.
For a company with several shareholders, that conversation could help avoid significant uncertainty later.
Sean Nolan examines the Companies Act 2014, minority shareholder remedies, shareholder disputes and the practical provisions that can be included in shareholders' agreements.
The contents of this article are meant as a guide only and are not a substitute for professional advice. The authors accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.
