Karen Edwards, Solicitor in our Commercial Team has drawn up this quick reference guide to demonstrate the importance and benefit of Shareholders Agreements.
Shareholders Agreements are:
- Contracts between shareholders to govern relationship
- Shareholders can discuss matters from the outset
- They safeguard against disagreements in future
A Shareholders Agreement will typically:
- Set out the shareholders’ rights and obligations
- Regulate the sale of shares in the company
- Describe how the company is going to be run
- Provide an element of protection for minority shareholders and the company
- Define how important decisions are to be made
MAIN TOPICS
1. Financing the company and giving guarantees
Parties can agree:
- When shareholders are required to invest further monies;
- If they are required to personally guarantee loans to the company and how that responsibility is shared; and
- How shareholders loans are to be repaid.
- If no obligation to invest, could mean no funding, making company unsustainable.
- If silent on loan repayment terms, this is repayable on demand which could lead to financial difficulty.
2. Minority Protection Rights
- Minority shareholder (less than 50% shares) has little control or say in the running of the company.
- Can prevent certain material decisions being made unless a set percentage of shareholders agree by including minority protection provisions. E.g.
- issue of new shares
- appointment or removal of directors
- taking on new borrowings
- changing the main trade.
- For important decisions, may require unanimous vote but beware, could cause problems and ultimately prevent the company carrying out its business.
3. Deadlock
- Equal number of shareholders holding an equal number of shares could cause deadlock
- Discussing the issue to reach agreement is not always possible- should have method in place
- Deadlock provisions will first set out a procedure to be followed to reach a joint decision
- Failing that, one party either sells their shares or buys the other party’s shares.
- If no party serves a notice to either sell his shares or buy the other shareholder out, the shareholders agreement may then stipulate that the company is to be sold.
- Without method in place no obvious way forward but difficult working together.
4. Transferring Shares
- Should set out the rules governing share sales and transfers.
- Allows company, to an extent, to maintain control over the ownership of those shares
- In absence of this, could be sold to a third party with no interest in the business/a competitor.
- Could be a right of pre-emption for continuing shareholders, then for company, before being able to offer to a third party.
- Can be specific on how shares should be valued.
5. Deemed Transfer Provisions
- Should include a formal exit route- states how a shareholder can leave and how and by who their shares will be valued.
- Deemed transfer on death. Also consider cross option- requires Shareholder to take out a life policy written in trust for the other shareholders. When Shareholder dies, proceeds of policy are paid to the remaining shareholders to be used by them to buy the deceased’s shares. Otherwise shares would simply go to estate- lose control.
- Other examples:
- ceasing to be a director- consider good and bad leaver here- par value?
- bankruptcy
- incapacity
- Without this, could have a Shareholder who is no longer a director but has bad feeling, or a Shareholder who doesn’t contribute.
6. Sale of the Company - Tag and Drag
- A third party may not wish to purchase shares in the company unless he is able to purchase them all.
- Equally, a minority shareholder may not want to remain a minority shareholder in a company if the majority shareholder changes.
- If an offer is made to a majority shareholder they can “drag along” a minority shareholder and force them to sell their shares- allows majority shareholder to realise investment at a time and price which they feel is appropriate
- If someone is willing to buy the shares of a majority shareholder, that majority shareholder can only sell the shares if the same offer is made to all shareholders including the minority shareholder i.e. the minority shareholder can “tag along” – allows minority shareholder to receive same return on their investment.
- Could allow minority to prevent a sale or be left working with unfavourable third party
Our Commercial Team, based in Christchurch, also cover Bournemouth, Poole and the New Forest. For a free initial chat, please call 01202 499255 and Karen or a member of the team will be happy to discuss any questions that you may have.
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