Each share in a limited company carries a number of votes. These are referred to as ordinary shares and usually carry one vote per share. A majority of over 50% will control the company. Using a shareholders agreement protects a minority from being exploited and provides a more equal distribution of power.
Karen Worth, a Solicitor in our Commercial Team, says “A shareholders agreement will regulate the relationship between shareholders and set out limits for director-shareholders. It is your ‘wish list’ and what it contains is entirely up to you.”
Small businesses normally have three sources of income:
- Cash subscribed for shares
- Profits of the company re-invested
It is also worthwhile protecting ‘intellectual property’ by incorporating provision in the shareholders agreement. The name of a company, copyright etc can be very valuable. An exit strategy should also be considered – especially if you have loaned the company money and want it back by a specified time. No one can predict the future and one alternative is to set down a statement of intention. This is not legally binding but serves as a reminder of the time frame. The lender may have a separate loan document and this provides the right to enforce action.
Another alternative is to make provision for precise events that may occur in the future. These might include:
- The sale of the company
- Shareholders buying out other shareholders
- The sale of the business out of the company
- Seeking to ‘float’ shares
- Seeking third party finance
- The company selling assets and being wound up
Karen concludes “There are many areas to be considered in setting out a shareholders agreement and I will be happy to guide you through them. please contact me if you would like to discuss this further at a free initial meeting.”