The importance of a shareholders’ agreement
Some of the questions we are most frequently asked nowadays are around the subject of shareholders’ agreements so we thought today we’d share with you a little bit of our knowledge and thoughts.
What are shareholders funds?
Company Law states shareholders who:
- Own more than 50% can pass a motion at a company meeting regardless of the views of other shareholders
- If that shareholder(s) owns more than 75% of the shares they control the company outright and can veto the decisions of all other shareholders.
This may not suit all business situations, especially where you have two or more founders holding equal share capital or a group of owners with varying amounts of capital, some of whom are directors and some who are not, but who are all working together for the company’s success.
A shareholders’ agreement is entered into between all or some of the shareholders in a company. It governs the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. They also help dictate the way in which the company is run.
What is a shareholders agreement?
A shareholders’ agreement can help define how a business makes decisions to the benefit of all owners and is recommended where:
- A small number of owners want to reach collective and fair decisions for the benefit of all
- Some owners may want to be able to influence decisions that are particularly relevant to them
- Some shareholders may not be directors and cannot influence operations on a day-to-day basis
Typically it is seeking to deal with the three “D’s” of death, disability, and disagreement. It also regularly helps advise over the retirement of a director or the buying back of shares.
Key areas for any shareholder agreement
This is not a comprehensive list as each situation is different, but it may help you collect the thoughts of all shareholders before you draw up an agreement.
- Company details including structure, directors, and officers
- Purpose and aims of the company
- Equity split of shareholders
- Parties to the agreement
- Shareholders rights, obligations and commitments
- Decision making processes on major issues required voting majorities and day to day operating decisions
- Restrictions on the sale of shares
- Rights of first refusal and pre-emptive rights to acquire shares on leaving, retirement, death, or disability
- Death, disability, and other retirement compensation payments
- Management contracts, director approval, and remuneration amounts
- Insurance and other protective requirements
- Professional advisers and change of professional advisers
- Dispute resolution
- Changes to and termination of the agreement
- Buy out provisions for leaving shareholders
- Valuation of shares on changes and valuations of the business
Over the years many clients have strayed away from an agreement due to the perceived expense of setting the proposal up in the first instance. Our view is that a shareholders’ agreement is an essential document for any limited company and an equitably drafted agreement should provide comfort to all parties to the agreement. We have seen many instances in the past where specific scenarios would have been much better dealt with given the intervention of an agreement and in our opinion the benefits far outweigh the costs.
There really is no bad time to set up a shareholders’ agreement, so please get in touch if you need help in planning for an agreement, especially where there are several shareholders, a new company is being formed, a shareholder wants to sell their shares or pass them to their children, someone is nearing retirement, or the company has borrowed money from a shareholder.
We will be happy to assist with share and company valuations and putting the shareholders wishes into an agreement with our local, recommended solicitor.
Need some expert advice, contact us today!