Shareholder agreements - Staking your claim in the business
Investing time, energy and your own money in a business is a big commitment, so it may surprise you to hear that many businesses, both new and established, do not have shareholders’ agreements in place.
A shareholders’ agreement provides a clear framework of how a business is run, helps protect the value of your investment and sets out what happens if the shareholders disagree. As a corporate finance lawyer, I have lost count of the number of clients I’ve referred to our dispute resolution team to help resolve a disagreement with fellow shareholders – a situation that may be eased or avoided by a suitable shareholders’ agreement.
Shareholders often say they do not take the trouble to make an agreement because they do not see the benefit or want to avoid the legal fees. In the excitement of a new venture, it’s easy to see how everyone trusts each other and assumes nothing will go wrong. However, two or ten years down the line, the position can be very different. There are also situations where an agreement is in place but circumstances have changed making it no longer fit for purpose.
A shareholders’ agreement provides a clear framework for what happens in the event of a dispute but also the other provisions contained within it may prevent the arguments occurring in the first place. Without a suitable shareholders’ agreement, disputes may be more difficult to navigate, leading to expensive and damaging stalemates that end up harming the business.
Key issues in a Shareholders’ Agreement:
- Directors’ powers: a shareholders’ agreement will set out actions and decisions the directors cannot take without the consent of the shareholders.
- Shareholder voting: often companies are run by a majority decision but there may be some decisions that should be unanimous of their potential impact to the value of a shareholding (e.g. issuing new shares, taking on borrowing, changing the main business activity of the company).
- Deadlock: where more than one person makes decisions, disagreements can lead to a deadlock situation. The shareholders’ agreement will contain a mechanism and procedure to ensure a resolution is reached in these circumstances.
- Transfer of shares: should a shareholder be permitted to transfer shares? If so, should they be offered to the other shareholders first and at what price? If not, who can they be sold to?
- Exits: what happens if a shareholder who is also an employee or director wishes to leave? Should they be forced to sell their shares? If so, at what price? In such circumstances it is common to differentiate between a shareholder leaving for “good” reasons (e.g. death or disability) or “bad” reasons (e.g. to compete). It may be sensible to arrange insurance contracts raise money to buy shares if a shareholder dies.
- Restrictive covenants: these prevent shareholders leaving the company and setting up in competition. It is also usual to include confidentiality provisions to protect business information.
- Third party offer: what happens if a third party comes in with an offer to buy the Company? Should minority shareholders be obliged to consider it or accept it in certain circumstances?
Shareholders’ agreements can benefit both majority and minority shareholders and, although the best time to put a shareholders’ agreement in place is at the point the company is formed, it is never too late. If you are a shareholder in a private company or are considering setting up a business with others, then you should consider the benefits of a shareholders agreement.
Legal advice – at a special rate
asb law is offering a discount to anyone that instructs us before 31 December 2015 for shareholders’ agreements to be drafted in January 2016.
This article was published in the Travel Trade Gazette on 3 December 2015.
To download the article, please click here.
For more information, please contact Helen Mead, Partner - Head of Corporate Finance, on 01293 603640.
Published: 27 Nov 2015