A shareholders’ agreement is a private contract between the shareholders of a business that regulates the relationship between shareholders, the management and running of the business, ownership of shares, amongst other things. It is a useful tool in setting boundaries between the shareholders and directors and also for succession planning.
Why should you have one in place? Here are 10 reasons why:
When you start a new business relationship you do not expect there to be any disagreements along the way. However, the truth is that fall outs and differences in opinions do happen. Implementing a shareholder’s agreement from the outset makes dealing with these types of issues much easier and sets the framework of how issues and disputes should be dealt with, and in a lot of cases, preventing them in the first place.
Regulating Internal Management
In some cases where a shareholder is not also an acting director, they may want to be involved in some decision making of the company. . By including these types of provisions in a shareholders agreement, this can protect a shareholder’s interest, focus the minds of the directors and make decision making more efficient.
Protection for Minority Shareholders
A shareholder’s agreement can help to provide protection for minority shareholders, for example, preventing allocating new shares which would consequently dilute their shareholding, without their consent or involvement. The shareholders agreement can also contain things such as ‘tag-on’ clauses which allow a minority shareholder to participate if there is a wider sale of the company preventing them from being left behind..
Protection for Majority Shareholders
A shareholders agreement can also be used to protect the majority shareholders. ‘Drag-along’ provisions could be included which would allow either nominated shareholders (or shareholders comprising a certain percentage), could require any and all remaining shareholders to participate in the sale of the company. This is particularly useful as most buyer’s will want to purchase 100% of a company.
Control the Transfer of Shares
There are no statutory controls requiring a pre-emptive offer of shares to be made to existing shareholders in a limited company. Therefore it is up to the shareholders to agree and specify any share transfer procedures. A shareholders agreement can include provisions requiring shares to be handled in a certain way f a shareholder wishes to exit or in some cases, is forced to leave. They are commonly known as pre-emption provisions giving the remaining shareholders of the company ‘right of first refusal’ over those shares. These provisions are helpful in setting the parameters for a shareholder’s exit and are there to protect the remaining shareholders in the event of the death or bankruptcy of a shareholder. They would also include a mechanism for valuing shares in the event of an exit which is useful in trying to avoid or deal with a dispute.
It is often the case that shareholders are also directors and/or employees of the business. When they inevitably leave for whatever reason, it is logical for their shares to also be dealt with at that time, otherwise, they could continue to benefit from a company they are no longer involved in. A shareholders agreement can include provisions requiring them to sell their shares when they leave as a director or employee.
In some cases, it is appropriate for a shareholders agreement to include certain restrictions on a shareholder whilst they are a shareholder of the company and for a period after they leave. Such restrictions could focus on their ability to set up or work for a competitor, poaching clients and staff and/or interfering with suppliers . It is also important to ensure that shareholders are required to keep company information, confidential. These provisions help to maintain the status quo and protect the goodwill of the business.
If disagreements do arise, the process in how to deal with these can be laid out clearly in a shareholders agreement. This may include an escalation procedure, referral to mediation, or who an arbitrator might be. All of which can help to avoid further disagreements And ensure that disputes are dealt with effectively and promptly.
Having a shareholders agreement in place helps to develop a level of business stability and maturity which can be important for third parties looking to invest.
A shareholders agreement can specify the dividend policy of the company, which may entitle shareholders to different dividends depending on their share class and responsibilities. Any provisions relating to differing share rights must also be recorded in the company’s constitution.
If you wish to discuss creating a shareholder’s agreement for your company, or if you are looking for more information about how they may benefit your business, please contact our corporate legal team.