Why Your Business Needs a Proper Shareholders' Agreement?
Every week in Nigeria, a business dispute begins not in a courtroom, not in a regulator’s office, and not with a client complaint but in a boardroom, when two shareholders
- By Colin Egemonye
Every week in Nigeria, a business dispute begins not in a courtroom, not in a regulator's office, and not with a client complaint but in a boardroom, when two shareholders who used to agree on everything suddenly cannot agree on anything.
The company may be profitable, the product may be excellent, the market may be growing, but the business grinds to a standstill, because the shareholders agreement that was supposed to prevent this from happening was either never properly drafted, reviewed after it was signed, or, in a surprising number of cases, never prepared at all.
This is not a problem confined to small businesses or early-stage startups. It is a problem we see at every level of Nigerian corporate life, whether in mid-sized companies, in family businesses, or in businesses backed by institutional investors.
What a Shareholders' Agreement Actually Does
A shareholders' agreement is the foundational document that governs the relationship between the owners of a company. It is separate from the company's articles of association which deal with the company's internal governance and are registered with the Corporate Affairs Commission and it operates as a private contract between the shareholders themselves.
When done properly, a shareholders' agreement answers the questions that really matter when a business is under pressure. Such questions include,
• Who can sell their shares, and to whom?
• Can a majority force the whole company to sell?
• What decisions require every shareholder's consent?
• What happens when the board cannot agree?
• How is a departing shareholder bought out?
When done poorly, it leaves these questions to be resolved through negotiation at the worst possible moment, or through Nigerian courts which is unpredictable. Either way, the business is the casualty.
The Most Common Problems We See
1. The Template Problem: In practice, we see consistent patterns that could have been avoided entirely with the right documentation. Many Nigerian businesses use shareholders' agreements drafted on templates downloaded from the internet, or adapted from agreements used in a previous transaction with a different set of shareholders, a different business, and a different set of risks. The clauses that protect you are the clauses that address your specific situation and not the situations of every other company for which the template was designed.
2. The Review Problem:. A shareholders' agreement that was adequate when it was signed may be inadequate three years later, when the business has grown, new investors have come in, and the original shareholders' roles and relationships have changed. Most Nigerian companies never review their shareholders' agreement after signing it. They discover it is inadequate when they need it most.
3. The Absence Problem: This is the most serious problem. A huge number of Nigerian companies with multiple shareholders have no shareholders' agreement at all. Their relationship is governed entirely by the company's articles of association, which are standard-form documents designed to cover the minimum legal requirements and are completely silent on the issues that actually determine how a multi-shareholder business operates in practice.
The Four Clauses That Matter Most
In experience, four clauses determine the vast majority of disputes and outcomes.
a. Pre-emption rights: give existing shareholders the first opportunity to buy shares before they can be sold to an outsider. Without clear pre-emption rights, a shareholder can sell their stake to a competitor, an unwanted third party, or simply someone the remaining shareholders would never have chosen. In a Nigerian family business, this is a real risk.
b. Drag-along provisions: give a majority shareholder the right to compel minority shareholders to sell their shares on the same terms in a company sale. They protect the majority's ability to execute a clean exit without a minority holdout blocking the deal. But the terms must be carefully calibrated as the threshold, minimum price floor and the valuation mechanism all matter enormously.
c. Reserved matters: are decisions that require more than a simple majority to approve i.e. the mechanism through which minority investors obtain governance rights without holding a controlling stake. Approving new debt above a threshold, issuing new shares, entering into related-party transactions, appointing the Chief Executive are decisions that define the strategic direction of a business and should not be made by a simple majority alone. The calibration of the reserved matters list is one of the most important elements of any shareholders' agreement.
d. Deadlock provisions: While CAMA 2020 allows for share buybacks and court intervention to break deadlock, parties often rely on Section 22 and the adoption of bespoke clauses within their Articles of Association to address what happens when the board or the shareholders cannot reach the required decision. Without a deadlock mechanism, a company that cannot agree on a reserved matter is simply paralysed. The best agreements provide for a structured escalation process and, if it does fail, a buy-sell mechanism that creates strong incentives for both parties to offer a fair price rather than exploit the deadlock for tactical advantage is created.
When Should You Review Your Agreement?
There are five moments at which a Nigerian business should treat a review of its shareholders' agreement as non-negotiable.
a. The first is when a new investor comes in, as every new investor changes the dynamics of the company's ownership structure.
b. The second is when a key employee is given equity so the agreement defines rights, obligations and exit paths.
c. The third is when the company enters a new sector or a new jurisdiction. Regulatory obligations, governance requirements, and the risk profile of the business change with each new context.
d. The fourth is when the valuation of the company changes. A formula that worked at ₦50 million may be deeply unfair to one party or the other at ₦5 billion.
e. The fifth is before any sale or fundraising process. A poorly drafted or outdated agreement delays transactions, and in serious cases causes deals to fail entirely.
The Commercial Case for Getting This Right
Nigerian businesses that take their shareholders' agreements seriously are businesses that are ready to weather the inevitable moments of disagreement that arise in every long-term business relationship. Those that do not are, in many cases, one dispute away from a crisis that could have been entirely avoided.
The cost of a proper shareholders' agreement drafted by experienced counsel, tailored to the specific company and its shareholders, and reviewed whenever the business changes materially, is a small fraction of the cost of a shareholders' dispute.
...Colin Egemonye writes from Lagos.
