A shareholders’ agreement is not a legal requirement and may be overlooked when individuals are setting up a new company (or investing in an existing one) with more than one shareholder. However, a shareholders’ agreement can be an important tool in documenting the relationship between the owners and can avoid complications if/when a dispute occurs in the future. Preparing a shareholders’ agreement involves contemplation of a wide range of possible scenarios and circumstances including how decisions are made and what would happen if the shareholders had a disagreement or one of them died.
This blog will look at some of the common points which can be covered by a shareholders’ agreement. It is important to note that a company’s Articles of Association sit alongside such an agreement and also play a large part in governing the day-to-day management of the company. As part of the process you will need to consider which provisions should be contained in the company’s articles and which would be more suitably contained within the shareholders’ agreement. A benefit of shareholders’ agreement is that they are private so, unlike the company’s articles of association, they cannot be viewed by any third parties.
- ‘Drag along’ and ‘tag along’
Drag along provisions protect the majority shareholder(s) where an offer is made to buy all the shares in the company. A drag along would enable the majority shareholder(s) to make the minority shareholders accept the deal, which would avoid one difficult shareholder from preventing the sale. Conversely, a tag along provision would protect the minority shareholder(s) in the event the majority shareholder(s) have accepted an offer for their shares. A tag along would mean the minority shareholder(s) can compel the majority shareholder(s) to ensure the offer is also extended to the minority shareholder(s).
- Deadlocked decisions
The shareholders’ agreement can contain a resolution in the event there is a deadlock. This may include a call option (where one shareholder can buy the other out) or stipulate the circumstances where an arbitrator shall be appointed to resolve a dispute.
- Competition restrictions
The shareholders’ agreement could attempt to prevent shareholders from carrying on, or being employed by, a business which would be in direct competition with the company, within a certain territory, for a certain period of time, once they have left. This can also extend to preventing the exiting shareholder from enticing away customers, employees or key suppliers. If such a provision is to be included within the agreement, this should be drafted carefully to ensure it doesn’t go further than required and consequently run the risk of being deemed unenforceable.
- Death or incapacity of shareholder
In the absence of a shareholders’ agreement (and/or a specific provision in the articles) on death, a shareholder’s shares would pass in accordance with their will or under the intestacy rules. This will usually not be appropriate as the inheriting party may have no, or very little, knowledge or connection with the business of the company. Depending on the relevant shareholdings, it may leave the surviving shareholder in a position where they cannot pass any member resolutions and possibly board level resolutions. The agreement could prevent such a situation by including a cross option between the shareholders which would require the shares to be purchased by surviving member(s) - this can be backed up by insurance to ensure the surviving member(s) can fund the purchase of the shares.
- Restriction on shareholder’s actions
It may be necessary in some circumstances for provisions to be included which restrict shareholder’s ability to do certain things without the consent of the other shareholders, for example, limiting how much one shareholder can spend or preventing them from hiring employees above a certain salary.
There are a multitude of other provisions which may be relevant to your company including provisions as to the payment of dividends and the issue of new shares etc. which is why it is important to discuss the contents of the agreement in detail with your legal adviser to ascertain any general and specific terms you require. The agreement can be as complex or simple as you like but it is important to get it right from the start as once it is entered into, it is likely that all shareholders will need to consent to any amendments in the future.
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