The importance of a shareholders agreement
A shareholders’ agreement is entered into between all or some of the shareholders in a company and regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. It also governs the way the company is run.
Without anything to say otherwise, Company Law states that limited company shareholders who own more than 50% can pass a motion at a company meeting regardless of the views of other shareholders. If a shareholder(s) owns 75% or more of the shares they control the company outright and can veto the decisions of all other shareholders.
This latter scenario may not suit all business situations! You have two or more founders holding equal share capital or a group of owners with varying amounts of capital, some of whom are directors and some who are not, but who are all working together for the company’s success.
A shareholders agreement can help define how a business makes decisions, which can be helpful to all the owners and is recommended where:
- A small number of owners want to reach collective and fair decisions for the benefit of all.
- Some owners may want to be able to influence decisions that are particularly relevant to them.
- Some shareholders may not be directors and cannot influence operations on a day-to-day basis.
Typically, a shareholders agreement deals with the three “D’s”, being Death, Disability and Disagreement. It may also cover a variety of other significant areas, for example retirement and buy back of shares.
We think a shareholders agreement is an essential document for any and all limited companies.
A well-considered agreement should provide comfort to all involved parties, and cover most issues that may arise. It removes the emotion of decisions at some key points in the life cycle of a business, at times when they could otherwise run extremely high.
We’ve known such an agreement to be the solution to some very tricky situations over the years!
Key areas to include
The list below is not exhaustive, as each situation is different, but by working through the following and thinking about how you might like to handle them should they occur, it may help you collect the thoughts of all shareholders before you draw up an agreement.
- Company details including structure, directors and officers
- Purpose and aims of the company
- Equity split of shareholders
- Parties to the agreement
- Shareholders rights, obligations and commitments
- Decision making processes on major issues, required voting majorities and day to day operating decisions
- Restrictions on the sale of shares
- Rights of first refusal and pre-emptive rights to acquire shares on leaving, retirement, death, or disability
- Death, disability, and other retirement compensation payments
- Management contracts, director approval, and remuneration amounts
- Insurance and other protective requirements
- Professional advisers and change of professional advisers
- Dispute resolution
- Changes to and termination of the agreement
- Buy out provisions for leaving shareholders
- Valuation of shares on changes and valuations of the business
Please talk to us if you need help in planning for an agreement, especially where there are several shareholders, a new company is being formed, a shareholder wants to sell their shares or pass them to their children, someone is nearing retirement, or the company has borrowed money from a shareholder.
We can also help with related share and company valuations and can help consider the tax implications of different options, before or during conversations with your solicitor, who should ensure for you that your agreement will stand up to scrutiny should it need to do so!
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