Shareholders' Agreements What is right for your business and circumstances?

What is right for your business and circumstances?

Shareholders' Agreements, what is right for your business and circumstances, corporate commercial legal advice in Cambridgeshire and Northamptonshire

When a business is being setup or the ownership is changing, solicitors are often asked whether shareholders' agreements are strictly necessary, especially when the shareholders are family members or long-term friends and no dispute is anticipated. There are a number of reasons shareholders’ agreements can be helpful:

Shareholders do fall out

Disagreements can occur and trying to agree the provisions that should apply if you fall out when you have already fallen out is almost impossible. It is easier to formalise the approach that will be taken if the relationship does turn sour in an agreement at the outset, rather than to risk waiting until differences of opinion become entrenched.

As a shareholders’ agreement is a private document, there is generally no requirement to file it at Companies House, meaning its content can be kept confidential.

Regulate company management

Generally, the running of the company is left to the board of directors. However, the shareholders may believe that there are certain decisions that should not be left to the discretion of the directors and instead require shareholder approval, particularly if there are directors who are not shareholders.

Minority shareholder protection

A shareholders’ agreement can provide protection for minority shareholders by reserving certain decisions, such as the ability for the company to issue further shares, which can only be made with the unanimous consent of all the shareholders. The agreement may also contain “tag along” provisions, which enables a minority shareholder to “tag on” to a majority shareholder in a share sale situation where the majority attempt to sell only their shares rather than seeking to find a buyer for all the shareholders.

Majority shareholders protection

“Drag along” provisions would usually operate where an offer is received to buy all of the shares in a company and the majority shareholders wish to accept that offer. The rights allow the majority to force the holders of the remaining shares to accept the offer on the same terms so that they do not scupper the deal.

Transfer of shares

A shareholders’ agreement can provide a mechanism which, where one shareholder wishes to sell their shares, effectively gives the other shareholders or the company (as the case may be) a “right of first refusal” over those shares.

This can be used to try and restrict who may or may not acquire shares in the company.

This can be a useful tool, particularly for small businesses that may wish for the initial shareholders to retain the shares, rather than allow external investors and unknown individuals to come in. After all, you have gone into business with your business partner for a reason.

Potential to link shareholdings to employment

Often shares in a company are held by the directors or key employees of the business. If they were to resign or leave for whatever reason, you would more than likely want them to sell their shares, otherwise they could remain entitled to receive dividends that would be generated by the on-going shareholders hard work.

A shareholders’ agreement can provide a mechanism whereby a person’s shareholding is linked to their employment, so that if they were to leave they must offer their shares up for sale. Otherwise, there is no requirement for them to sell their shares if they cease to be employed by the business.

A shareholders’ agreement can go further and include a mechanism which sets different valuation mechanisms depending on the circumstances under which the relationship with the company comes to an end.

Restrictions

In the event that a shareholder seeks to exit the company, the remaining shareholders may wish for restrictions to apply to the exiting shareholders’ ability to set up or work in a competing business. These restrictions can be stricter than may exist in any employment contract and can be very valuable in protecting the interests of the company moving forward.

Dispute Resolution

If disputes do occur, there can be specific provisions for dealing with disputes laid down. These may include at what stage there would be a referral to mediation, or who any arbitrator may be etc.

Varied dividend policy

A shareholders’ agreement can set out a varied dividend policy which may allow different dividends to be payable to each shareholder, where they have different classes of shares.

For further information and advice on shareholders' agreements and what is right for you please contact our corporate commercial team on 01733 882800 or email info@hcsolicitors.co.uk.

Author

Olivia Chalmers, Solicitor

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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.