Understanding the Importance of Shareholder Agreements

A Shareholders Agreement will not be the first thing that a new business owner will be thinking of. You have set up your company, found your joint venture partner or investor and you are getting on with business. The early stages require supreme effort and long hours, but the rewards are there, working for yourself and owning your business is both challenging and satisfying.

There are so many things to do and think about and not enough time to deal with it all. Yes, you know that a Shareholders Agreement is what you should have, but your relationship with the other shareholders is good i.e. you all think and strive to develop business and to grow the sales or services. Legal arrangements can be done later, when spending money on legal agreements is not as much dictated by a tight cash-flow.

All this is perfectly understandable, it just happens that we lawyers come across clients all the time who did not set up a Shareholders Agreement at the beginning and as a result they are facing a difficult and costly process to try and sort out the challenges they are facing.

Shareholders Agreement – it is always better to have one in place from the outset

Putting a Shareholder Agreement in place at the beginning of your business venture will give you a proper foundation upon which to build your business. A straightforward approach on how you agree to deal with each other in a business environment, how you make decisions, what roles each will have etc can only help rather than hinder business. There is also the unwanted possibility that things turn sour, people and attitudes change, things that you thought were agreed by a handshake are not recognised nor valid anymore. It is your word against the other shareholders. One party might want to exit the business. What should happen to his/her shares? You might find yourself in a position in which you have a shareholder that does not have the same aims or business drive as you or is simply no longer interested in the business. Now, you have, in addition to running the business, the worry of having to establish what your rights are in respect of the other shareholders.

Shareholders Agreements are not necessarily complicated, they can be straightforward

A Shareholders Agreement does not have to be complicated. Beyond certain standard provisions, it is up to the parties to decide to what extent they want to provide for every eventuality. There are occasions when share rights and exit provisions, for example, will require meticulous drafting and in-depth advice. For small businesses, however, it is common for share rights and exit arrangements to be straightforward.

Shareholders Agreement – common provisions

A Shareholders Agreement will establish the rules and conditions upon which the shareholders will operate within a company. The agreement will contractually bind the parties and it is common for any future shareholders to sign up to the agreement as well. Unlike the Articles of Association of the company, the shareholders agreement will not be filed with the Registrar for Companies in the UK (Companies House). Your arrangements will therefore remain private.

In general, a Shareholders Agreement will deal with:

Company’s business – describing the business that the company will be undertaking. If a joint venture is being set up for a certain project, what will this be dealing with, its’ purpose and the participation of each party to it.

Management – how the Board will operate and make decisions if different from the Articles of Association of the Company;

Shareholders’ Consent – any matters requiring the consent of the shareholders whether by unanimity or decisions that can only be vetoed by a certain shareholder;

Share rights – the rights attaching to the shares for different shareholders e.g. dividend rights, rights on a liquidation;

New Shares – rights on issue of new shares e.g. any pre-emption rights;

Existing shares– rights on transfer (sale) of shares; any pre-emption rights as to transfers, usually not dealt with in the UK’s Companies Act; valuation of the shares on transfer;

Compulsory transfer of shares – any compulsory transfer of shares provisions, for example upon the death of a shareholder, bankruptcy/insolvency, ceding to be a director, termination of a service agreement with the company, committing a material breach etc.

Restrictions – any restrictions on shareholders, for example competing with the business;

Drag along rights – these rights allow the majority shareholders to sell their stake to a buyer that is only interested in acquiring 100% of the share capital of the company and therefore make it compulsory for the minority shareholders to also sell their stake;

Tag along rights – often requested by minority shareholders these require the majority shareholders to include the minority shareholders in a share sale;

Warranties – may be given by shareholders, for example, around their ability to participate as shareholders in the company;

The above-mentioned points are not exclusive and often clients explain what they have agreed to and would like this to be inserted in the shareholders agreement as well. There are things that clients sometimes suggest that cannot be put in place because the laws and regulations that govern companies in England and Wales do not allow them or only allow them if certain conditions are met. A good example is share buy-backs that can be made only under certain circumstances and under certain rules.

Shareholders Agreement – Cloudlegal’s approach – How do we go about helping you implement a Shareholders Agreement?

Having spoken with you about your business, we usually prepare a first draft that we then talk through with you to check whether it needs to be expanded upon, or reduced. We prefer to highlight more and then reduce it, as often, in our experience, clients do not think of certain issues until they are highlighted. The cost is not affected by this, it will lead to a more thorough reflection of what the shareholders can achieve. It is always good to be clear from the start what needs to be done and why a Shareholders Agreement is structured in this way. A clear set up leads to clear understanding and drafting and a proper explanation of the rights and obligations for the shareholders involved.

If you would like more information or if you would like our support implementing a Shareholders Agreement, we will be delighted to help.

Book a 1 hour lawchat with us – https://cloudlegalsupport.com/business-templates/corporatecompany-structure-60-min/ or, request a quote for free here – https://cloudlegalsupport.com/request-a-legal-quote/

Author: Anca Thomson

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