A shareholders’ agreement is an agreement entered into between all or some of the shareholders in a company. It regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. It will also govern the way in which the company is run. It may be usual to combine the use of a shareholders’ agreement with a specifically drafted set of articles of association for your company. In this article, key elements of a shareholders’ agreement, we consider the most important points to include when drafting this document.
Free Initial Telephone Discussion
For a free initial discussion on how we can help you create a shareholders’ agreement, get in touch with us today. We are experienced in dealing with all forms of corporate negotiations and we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.
What are the key elements of a shareholders’ agreement?
There are a number of elements to consider when creating a shareholder’s agreement. It is better to ensure the agreement is robust and covers as much detail as possible. This will ensure that all parties know where they stand from the start and will eliminate any potential friction caused by uncertainty later down the line.
Even with the best will in the world, it will be highly unlikely that the agreement will cover every single thing in detail. Further, whatever level of detail the agreement goes into, it must accord with company law.
Restrictions on changing the nature of the business. The business may well evolve over time. This could be as a result of reacting to market conditions by changing the products or services being offered or where or how the business operates. Some changes are relatively straightforward whereas others can prove to be more problematic. The process for changing the nature of the business should be set out within the agreement.
Terms regulating the raising of capital to avoid diluting existing shareholdings. At some point in the future, it may be decided that an injection of capital is required by the business in order to flourish. However, this will have the effect of diluting existing shareholdings and as such, the precise terms setting out the mechanism for this need to be included in the agreement.
Restrictions on the disposal of shares. There are a number of ways in which shares can change hands. The other shareholders can control, to some degree, to whom the shares are transferred and what role the new member plays in the company by setting the rights and powers on transfer. However, provisions that prevent the transfer to certain specific classes of people may prove to be problematic.
Managing changes in the roles shareholders play. The directors of the company manage the company and report to the shareholders. The agreement can specify the role a director can play or the limits of his authority. It should also reflect what happens when a member wants to be more or less active in the day to day management of the company. It is also important to include the rights to appoint and remove directors and also the terms to protect minority shareholders so that, for example, unanimous shareholder approval is required for certain company decisions. Identify who will make decisions – shareholders or directors. A good shareholders agreement should set out the decisions a shareholder-director may and may not make without agreement from others.
Include a business plan. Setting out the business plan in a shareholders’ agreement may help to ensure that all shareholders are aligned with the direction in which the business is heading. Additionally, a description of the proposed terms of the exit strategy can be helpful although it can be quite difficult to predict future events that would trigger an exit event.
Include restrictive covenants to prevent a former shareholder from setting up in competition. One of the shareholders may decide that he can set up in competition. This can often happen if he/she has also worked in the business. There may be linked employment issues in competition that are covered by the employment contract, but a shareholders agreement should also include provisions for competition.
Set out the dividend policy. This should state how and when dividends are to be paid and also include if any shareholders are to waiver their rights to dividend payments.
Settling shareholder disputes. Unfortunately, shareholder disputes can and will arise. They can easily become protracted diverting focus and resources away from the business. Consequently, setting out a mechanism for dispute resolution is a sensible thing to do.
How do you terminate a shareholders agreement?
You can terminate a shareholders agreement in one of three ways.
The first way you can terminate a shareholders agreement is by mutual agreement. This is when all of the shareholders decide that they no longer want to comply with the agreement due to various reasons. The reasons can be from dissolving the company, selling their shares in the company or the company itself or it can be deciding to leave the company. In a well-drafted shareholders’ agreement, these provisions should be included.
Secondly, the shareholders’ agreement may automatically be terminated if there has been a breach in the agreement by any of the shareholders. When this occurs the shareholders’ agreement will be terminated unless there are clauses in the agreement that sets out some form of mediation.
Thirdly, a shareholders agreement can be terminated if one of the shareholders want to leave the company. In this case, there will be certain provisions in the shareholders’ agreement to map out what should happen in this scenario.
How we can help
We have a proven track-record of helping clients set up shareholders’ agreements for businesses of all types. There can be an array of issues to take into consideration and we will guide you through all the necessary legal due diligence in a comprehensive and timely manner and support and advise you with all the negotiations. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of a shareholders’ agreement. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
Comments are closed.
