Why a shareholders’ agreement is a good idea

And why they are important when starting or investing in a business with other people

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Privately owned companies often operate perfectly well without any form of bespoke agreement between the director/shareholders governing their relationship and the running of the business. This is fine so long as an amicable decision making process continues and everyone is getting on with each other.

What if?

But what happens if one wants to exit the company and the other one doesn’t? What happens if one wants to bring in another investor and on what terms will it be? What happens if one wishes to sell the business to a third party but the other does not? What happens in the event of a dispute between them or if one of them dies?

In their ‘model’ form, the company’s articles of association, its internal governance rules, are unlikely to provide answers to these questions.

A well drafted Shareholders’ Agreement can provide for all of these situations and can be an insurance policy against substantial cost and time later on, by pre-agreeing how the parties and the company will address future events affecting the business.

Without a suitable agreement in place, it is left to the parties to reach a compromise at the time and that may be difficult or indeed impossible if they have already fallen out or, worse, one of them has died.

Protecting shareholder rights

A Shareholders’ Agreement can also be used to set the balance between the directors’ power to run the business day-to-day and the shareholders’ wish to have a role in strategic decision making.

For new business ventures, the investors and participants will want certainty as to how their relationship will be governed, what rights they will each have in the management of the venture, to know how the investment they are making into that business will be used, how the growth value will be protected and when they are entitled to a return on investment.

What might a Shareholders’ Agreement cover?

Shareholders’ Agreements can be as long or short as the parties require, but typically include some or all of the following:

  • Restrictions on transferring shares outside of the company;
  • Provisions enabling shares to be transferred to permitted transferees, such as close family members or into trust;
  • Obligations on shareholders to transfer their shares if certain events occur;
  • An agreed ‘exit plan’ to sell the shares or the business should an offer from a suitable buyer be received, and rights for majority shareholders to require the minority to sell on the same terms;
  • A bespoke dividend policy setting out agreed returns to the shareholders;
  • Agreement on how the reserves of the company will be distributed on winding up, and when and how shareholder loans will be repaid – is there an agreed order of priority?
  • Rights for shareholders (all, or just those holding certain classes of shares) to become directors or appoint a nominee director;
  • Rights of access to all financial information and records of the company, extending beyond the limited statutory rights to information which shareholders have;
  • Where there are shareholders holding majority and minority percentages of the shares, controls for the minority shareholders over certain key decisions which might affect the value of their shares or the rights attached to      them;
  • Provisions governing how to resolve a deadlock in decision making which might otherwise paralyse the company;
  • Agreement as to how the company will be financed in the future and by whom;
  • What will the process be for important strategic decisions, such as acquiring new subsidiaries or the company purchasing new machinery, or entering into significant contracts;
  • A limit on the appointment of additional directors without the consent of the shareholders;
  • What happens to the shares of a deceased shareholder, for example automatically offering the shares to the surviving shareholders first; and
  • Restrictions against competing with the company’s business.

Privacy

In contrast to the articles of association, which are kept on the company’s public record, a Shareholders’ Agreement is a private contract amongst the shareholders and in most cases does not need to be filed at Companies House. A Shareholders’ Agreement can therefore be used to record more sensitive commercial terms agreed between the shareholders, without the risk of such terms becoming public knowledge.

If you are going into a new business venture with others, or have been invited to invest in a company Hunt & Coombs Corporate & Commercial Team is on hand to assist in preparing a new Shareholders’ Agreement or reviewing and advising you on the terms of an existing Shareholders’ Agreement you may be required to sign up to.

For further information on shareholders’ agreements please contact the Corporate & Commercial Team on 01733 882800 or email info@hcsolicitors.co.uk .

Author

Ed Taylor, Senior Associate

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This article has been prepared for general interest and information purposes only; it does not constitute legal advice and should not be relied on as such. While all possible care has been taken in the preparation of this article, no responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the firm or the authors.