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More than one shareholder in your company? If so, without a Shareholders’ Agreement you are leaving your business open to a number of risks. Whether you are in business with family or friends or arranging a new investment in your business, it is advisable to properly document the shareholding relationship. Investing time and money in coming to an agreement between shareholders can protect your shareholding in the business in more ways than one.

Shareholders do fall out

On the initial start-up of a business and the beginning of a new business relationship, it is often difficult to anticipate future disagreements that may lead to an irreparable fall out. However, fall outs do occur and trying to come to an agreement on the provisions that should apply in the event of a fall out when it has already happened can seem impossible. Having a Shareholders’ Agreement in place outlining the implications and approach if a relationship turns stale can prove essential to the survival of the company.

Control the transfer of shares

If shareholders wish to restrict who is admitted as a shareholder in the company, a Shareholders’ Agreement can include the right of pre-emption whereby any shareholder wishing to sell their shares must first give the remaining shareholders, or the company, the right of first refusal on those shares. This is also a useful mechanism particularly for small companies as they may wish for the initial shareholders to retain their share of the company, preventing external/unknown individuals becoming part of the business. 

Transmission of shares

A Shareholders’ Agreement also has the ability to dictate how shares are transferred in the event of the death of a shareholder. For example, an insurance policy can be put in place which will provide the company with sufficient funds to purchase the deceased shareholding as opposed to allowing the deceased’s beneficiaries to inherit the shares and therefore have involvement or a say in a company they may have little knowledge of.

Valuation of shares

In most Shareholder Agreements, there are various events that would trigger a buyout of your shares.  These events would often include a buyout on death, on permanent disability, on bankruptcy, if your shares are to be transferred as a result of a marital breakdown, on a serious disagreement among shareholders and possibly on retirement. In order for a buyout to take place, there needs to be a value placed on the shares.  Normally, the valuation clause of a Shareholders’ Agreement will use a special term to determine what the buyout price is to be, for example, ‘fair market value’, ‘net book value’ or ‘nominal value’.

Potential to link shareholdings to employment

Normally shares in a company are held by those directly involved in the business, i.e. directors and employees. If either were to resign or leave the company for whatever reason, it makes sense that the remaining shareholders will want them to sell their shares back to the company. In the absence of any agreement to this effect, the departing shareholders will continue to be entitled to receive dividends generated by the hard work of the remaining shareholders.

A Shareholders Agreement’ can include a rule whereby a person’s shareholding is directly linked to their employment; therefore if they were to leave employment with the company, they must offer their shares up for sale. Otherwise, there is no obligation for them to sell their shares if they cease employment in the business.

Non-compete clause

In the event that a shareholder decides to leave the company, the remaining shareholders may wish to place restrictions on their ability to set up or work in a competing business. These restrictions can be valuable in protecting the interest of the company going forward.

Deadlock provisions

In the event of a dispute amongst shareholders, there can be specific requirements included in the Shareholders’ Agreement which dictate how these are to be resolved. These may include at what stage in the dispute to call in a mediator and dictate who this will be.

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.

Voting rights

A Shareholders’ Agreement typically contains a requirement that specified key decisions are approved by a special majority (which could be a unanimity requirement depending on the shareholder spread, but more typically 75% or some other percentage greater than 50%) or by a named party.

 

These are just a few of the reasons why a Shareholders Agreement’ is important for a company to have in its armoury and to protect individual shareholders. Any agreement should be reviewed periodically to check that it still operates in the way the company and shareholders wish it to and be updated and re-executed as shareholders come and go.

 

If you wish to discuss a Shareholders Agreement for your company, please contact us.