What is a shareholders’ agreement?

A shareholders’ agreement governs the relationship between a company, its shareholders and the shareholders themselves. The shareholders’ agreement provides a road map for the relationship between shareholders while they are in a relationship together and when they end that relationship.

Why have one?

The process involved in curating a shareholder’s agreement cannot be understated. We probe the shareholders for important information and the initial meetings might be considered akin to a “pre-nup” meeting of sorts. The process that we facilitate and in meeting everyone concerned is almost as important as the end product itself.

We often assist clients with disputes which arise when shareholders wish to sell their shares or exit a company, or if the company is doing particularly badly or even particularly well. It doesn’t matter how well you know the person you’re doing business with. Conflict is extremely common when two or more parties are in business together. In our experience, many of these conflicts tend to arise from personal circumstances, rather than day to day business operations. Those circumstances might include: a new romantic partner for a key person, a marital breakdown, a bad habit such as gambling or drugs, mental illness, or a large change in general life circumstances.

A well drafted shareholders’ agreement will:

  • provide a framework for the ownership and management of the company and related business;
  • signal to prospective investors and financiers that the company is stable, well‑managed and provide comfort over the company’s ownership and management;
  • specify how potential disputes between shareholders are to be dealt with. While disputes might seem unlikely, it is helpful to agree on the resolution process from the outset; and
  • deal with how core exit events are to occur and be funded.

What key issues should a shareholders’ agreement cover?

As no two businesses are the same, the shareholders’ agreement should be customised by a solicitor to suit the business relationship.  The following are some key issues which a shareholders’ agreement should cover:

No.

Item

Summary

Board Structure and Decision Making
  • A shareholders’ agreement should contain clauses relating to decision making, the rights of shareholders to appoint or remove directors and the powers of the managing director (if any).

Dividends, Funding, and Issue of New Shares
  • Dividends: A shareholders’ agreement should specify the circumstances in which dividends may be payable whether profits should be retained by the company for working capital.
  • Funding: The shareholders’ agreement should specify what is to occur if additional injections of capital are required.
  • Issue of New Shares: Similarly, if the company intends in the future to raise further capital by way of the issue of shares, consideration should be given to the process in these circumstances.

Selling Shares
  • First rights of refusal: A shareholders’ agreement will generally require a shareholder who wishes to sell some or all their shares to first give notice to the other shareholder(s) and offer them the option to purchase their shares, before selling to a third party. It should also be considered whether the founders of the company should have the first right to maintain control.
  • Drag Along: A ‘drag along’ clause is generally included which allows majority shareholders to force the minority shareholders to sell their shares in the event of a sale (usually triggered in takeovers, with the minority shareholder able to sell on same terms and conditions and price).
  • Tag Along: On the flip side of the ‘drag along’ a ‘tag along’ provision grants the right to a minority shareholder to ‘tag along’ in a sale of shares at the same price should they choose.

Deadlock
  • The shareholders’ agreement will generally specify as to what happens in the event of a deadlock.  Such as a ‘golden vote’ or the appointment of a referee just to name a couple of options.  There are multiple deadlock methods available which we can discuss further with you.

Working Owner Concept
  • In the context of start-ups or SME’s, shareholders will usually take responsibility for specific aspects of the company’s business either as an employee or a consultant referred to as a ‘working owner’.
  • Consideration should be had as to what happens if a ‘working owner’ is absent from ordinary work or the performance of their key roles and whether this should trigger an automatic sale of shares.

Buy / Sell Provisions and Insurance
  • Buy / sell provisions set out the rights and obligations of shareholders to buy or sell their shares in circumstances such as insolvency, disability, death, or retirement. They will need to include an appropriate valuation mechanism.  Insurance funding and vendor finance arrangements are generally also included.

Trade Restraint
  • A shareholders’ Agreement normally has a restraint which operates both while a shareholder is a member of the Company, and for a period after they have exited the Company.

Employee Share Schemes
  • Shareholders can cater for employee share schemes/incentives outside of the Government regulated ESS.
  • In the event an employee shareholder engages in serious misconduct (i.e., for a serious breach of the shareholders’ agreement or the terms of their employment or contractor’s agreement with the company), the shareholders’ agreement will generally grant the founding shareholders a right to take back shares of an employee.

Key Takeaways

A shareholders’ agreement is an extremely valuable document protecting the interests of shareholders and the future of a company and can be used to prevent and manage disputes and reduce the severity or collateral damage of those disputes. It also spells out how a shareholder may exit and how those exit events might be funded.

Remember that the process itself for the shareholders, coming to see lawyers, and being asked the hard questions (like a “pre-nup”), is a very valuable process that we can curate for you.

Please call the commercial team at Rouse if you want to discuss any agreement to govern a business with more than 1 owner.