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Keeping things agreeable

A Shareholders’ Agreement is an essential element at the start of any new venture. Paul Reader discusses the key things to consider when drafting the agreement – and when to review your arrangements.

“A shareholder’s right to be appointed as a board director can be preserved by the Shareholders’ Agreement, meaning that a business owner will always be present when key issues are discussed.”

What is it?

A Shareholders’ Agreement is a contract between the shareholders of a company, setting out how they will regulate business between themselves. Legally enforceable and requiring all parties to be compliant, it’s often easier to implement at the start of the company’s journey rather than later on as the business progresses.

It’s worth noting that the binding agreement is between the company shareholders, not the directors, although it’s often the case that their role spans both titles.

What does it cover?

The Agreement usually lays out all areas that require the consent of the shareholders, ensuring that minority interests are protected, and that fundamental business decisions are made with everyone’s consent. These usually include:

  • Selling the business, or any part thereof
  • Entering into any contract or transaction outside of the usual course of the business
  • Borrowing or raising money
  • Incurring capital expenditure over a certain limit
  • Holding any meeting of shareholders without the appropriate representatives
  • Altering any rights or restrictions attached to any class of shares in its capital
  • Changing the nature of its business
  • Removing or appointing any directors
  • Issuing additional shares.

A shareholder’s right to be appointed as a board director can also be preserved by the Shareholders’ Agreement, meaning that a business owner will always be present when key issues are discussed. To protect important business information, Agreements can also include restrictions around a shareholder’s employment – both while they work for the company, and also after they leave. Details relating to the sale of the business also belong in the Agreement.

Buying and selling shares

If a company shareholder wants to sell their shares, the Agreement will usually give the remaining shareholders a pre-emptive right to buy them, either at a price offered by the leaving party, or as determined by an expert (usually an accountant). This prevents an unwanted third party obtaining a stake in the business.

The Agreement can provide that in certain circumstances the Shareholders are required to offer the sale of their shares to others named in the Agreement. For example, in the event that:

  • The shareholder goes bankrupt
  • A charge is granted over the shares of that shareholder
  • A shareholder materially breaches the Shareholders’ Agreement or fails to remedy non-material breaches
  • The shareholder is no longer an employee of the Company.

Again, this helps to prevent a third party from taking a share in the business, at the same time preventing errant shareholders from profiting from it.

‘Til death do us part’

Perhaps one of the most important provisions in a Shareholders’ Agreement is what happens in the event of a shareholder’s death. Usually, their holdings will pass under a Shareholders Will – potentially giving a family member an interest in the company which may not be agreeable to the remaining Shareholders or the beneficiary who may want to realise the capital value of the shareholding. One way to deal with this is to put a cross option in the Agreement – meaning that the deceased’s estate can be forced to sell the shares back to the remaining shareholders or the beneficiaries can demand that the company or the shareholders buy back the shares that were left to them under the Will.

To keep things running smoothly, it’s important that agreements are reviewed on a regular basis. It’s also good to re-visit it at key points – such as when a new shareholder is appointed, or when a change of business is being considered.

Managing disputes

Disagreements between shareholders can happen – which is why the  Agreement should detail how to deal with them. In the absence of an agreement, the only way to resolve a deadlock situation is by applying to the court for a winding up of the company. This is often not in anyone’s best interests and can be drawn out and costly. Usually, the Agreement will set out a way of resolving disputes either by mediation or expert decision. Or, in the event of an irrevocable breakdown of relationships, it can include a procedure to determine which of the shareholders can purchase the shares of the disputing parties.

In short:

  • A Shareholders’ Agreement can ensure that important business decisions are made with the consent of all named parties
  • The Shareholders are often given a preemptive right to purchase shares from a leaving party
  • In the event of death, provision can be made so that the correct people retain control of the business
  • Disputes can be managed by means of pre-arranged mediation or expert decision.