Shareholders Agreements
What is a shareholders agreement?
A shareholders agreement is a document that governs the relationship between shareholders of a company. It sets out the rights and obligations of the shareholders, sets out what a company can and can’t do and regulates the sale of shares in a company.
Why do need a shareholders agreement?
It is easy to assume that nothing will go wrong in the future and hopefully nothing will. However, if a situation arises in future where there is a disagreement, for e.g. if one shareholder acts in a dishonest manner then there is normally not a lot that you can do to make them transfer their shares unless there are specific provisions contained within the documentation. If you are going into a new venture with someone, a shareholders agreement also gives you more confidence about your future relationships with them and helps avoid costly litigation in future.
Who needs one?
Whilst the shareholders agreement is recommended for every company, there are certain situations in which it might be more of a necessity. For example:
-Where an employee is issued shares or granted a share option as an incentive for their loyalty – in such a case you need to ensure that there is a carefully drafted shareholders agreement in place which provides for share transfer provisions to apply in the event that they cease to become an employee.
-‘Dragons Den’ type scenario – A third party investing money into your business. In such a scenario, the investor will want some control over the company to protect their financial stake.
-A company that offers professional services (Solicitors, financial advisers etc.) where a carefully drafted shareholders agreement will contain provisions so that if one of the shareholders is struck off or has their practising certificate terminated, then the other shareholders would be able to force a transfer of that person’s shares. How does the shareholders agreement protect a minority shareholder? Without a shareholders’ agreement, a minority shareholder (one owning less than 50% of the shares) will generally on their own have little control or say in the running of the company. Being a minority shareholder and having a shareholders’ agreement that includes the requirement for all shareholders to approve certain decisions ensures that you have a say in the important decisions that impact the company could give protection to minority shareholders. This affords the Shareholders the opportunity to decide on what is a crucial matter, as to whether key decisions under the Shareholder Agreement itself, should require a ‘majority’ or ‘unanimous’ vote. How does a shareholders agreement protect the majority shareholder? If a majority shareholder wants to sell their shares but a minority shareholder is unwilling to agree then including a provision forcing that minority shareholder to sell their shares is important otherwise the minority shareholder could hold the majority shareholders to ransom. This is often referred to as a “drag along” provision. This will then allow the majority shareholder to realise their investment at a time and price that they feel is appropriate. What does it cover? You can expect to see the following clauses in a carefully drafted shareholders agreement: Restrictions on share transfers so that you consent to who your fellow shareholders are. A requirement that shareholders consent is obtained for all key strategic decisions and expenditure made by the company. Restrictive covenants imposed on a shareholder to stop them from competing against the company after they have ceased to be a shareholder. Dispute resolution procedures. Is there a ‘standard form’ of shareholders agreement?
There are several ‘off-the-shelf’ agreements available for free download on the Internet. However, it is strongly advisable to have a well thought through agreement drafted to protect the specific situation at hand and the needs of the individual business.
Every situation requires careful thought and professional advice to ensure that the documentation is suitable for the intended purpose.
Contact Sweeney Miller Law’s commercial department for further advice on enquiries@sweeneymiller.co.uk or 03459005401
