Shareholders Agreements – A Handy Guide
The Corporate Department at Bennett Griffin LLP regularly assists Companies and individual shareholders with drafting new shareholders’ agreements.
Our Litigation colleagues also frequently resolve issues where the pathway would have been much clearer had a shareholders’ agreement been put in place.
This article seeks to answer some common questions about shareholders’ agreements and their content.
1. What is a shareholders’ agreement?
A shareholders’ agreement sets out the contractual agreement between the shareholders and usually the Company itself regarding how the Company will function.
2. Does my Company need a shareholders’ agreement, and when should this be put in place?
There is no hard and fast rule. If a company has more than a single shareholder, particularly if there is inequality in shareholdings, a shareholders’ agreement would be required. Timing-wise, the need for a shareholders’ agreement usually increases as the Company becomes more established and profits and/or assets hopefully increase.
3. Are there any restrictions on what I can agree to in a shareholder’s agreement?
Generally, no! Provided that provisions are lawful and sensible, pretty much anything can be agreed upon if it works for the parties. Shareholders’ agreements are also not public records, unlike other company documents, and hence, any agreement reached can be confidential. However, it is important that any shareholders’ agreement works in harmony with the Company’s articles of association and that any conflict is clearly addressed.
4. How does a shareholders’ agreement regulate day-to-day trading?
Although there is flexibility, typically, the following provisions are likely to appear in shareholders’ agreements:
- Share classes: If applicable, what dividend, voting and other rights do different classes of shares have? This needs to be clearly set out to avoid uncertainty;
- Quorum: Quorum is the number of people required to conduct business at any meeting. The Shareholders Agreement may vary what is contained in the Companies Act, particularly if some classes of shares do not have voting rights attached to them;
- Can you impose a limit on financial expenditure or decision-making? Yes, and this is particularly useful where directors are also shareholders. A personalised list of circumstances is usually agreed upon where all shareholders’ unanimous approval is required, including financial expenditure limits. Usually, this will seek to allow day-to-day trading to continue but capture exceptional events;
- What happens in deadlock or disagreement amongst shareholders? This is a particular problem where there are a small number of shareholders. If there are just two, what happens if they disagree on an issue? A mechanism can be devised either to create a casting vote for one shareholder or to establish a regime to refer matters to an expert for conclusive determination.
5. Sale and disposal of shares
These are critical issues. What happens if a shareholder wishes to leave the Company? What happens if they pass away or become long-term incapacitated?
Many companies trade in highly specialised markets or require owners to have specific knowledge or qualifications.
In either case, a third party nominated by a shareholder to purchase or receive their shares may not be acceptable.
The shareholders’ agreement will set out procedures for a shareholder wishing to dispose of shares. The agreement will require the shareholder to give other shareholders the right of first refusal, allowing them or the Company to step in to purchase the shares at an agreed-upon value.
In the case of an estate, the shares are converted to cash if this is exercised, which is preferable to both the estate and ultimate beneficiary, plus the Company.
Linked to this, in certain circumstances, what are known as call-options can be added, which compel the transfer of shares.
Examples could be:
a) Where shares are transferred to spouses for tax purposes, but the relationship breaks down;
b) Where a shareholder is deemed in breach of the shareholder’s agreement;
c) Where a shareholder is in danger of being declared insolvent; and
d) Where a shareholder becomes long-term incapacitated.
In such circumstances, the treatment of value may vary, with unfortunate circumstances distinguished from circumstances where the shareholder is at fault.
6. Minority Protection
If shareholdings are inequal, provisions can be agreed upon to mitigate such inequality, particularly where a minority either wishes to be included in a sale they are excluded from or is forced to agree with a majority.
7. Will the shareholders’ agreement need to be read frequently?
Hopefully not! The shareholders’ agreement is a “what if” document to be referred to when a circumstance arises that may be challenging to the Company.
It is designed to avoid disputes by setting out clear arrangements that have to be adhered to.
The above is not exhaustive but gives an idea of what type of circumstances can be covered.
For further information or to discuss your needs, please contact Nick Tompkin (NT@bennett-griffin.co.uk) or Lauren Baillie (LMB@bennett-griffin.co.uk) on 01903 229910 and 01903 229941 respectively.