Why do I need a shareholders’ agreement?
Supplement the articles of association and general company law
Link vesting of shares to contribution made to the business
Help to achieve your business objectives and avoid damaging and costly shareholder disputes in the future
Have you already been told that you should have a shareholders’ agreement in place but do not fully understand why?
Here are a few reasons.
Equity and vesting schedules
Keep everyone incentivised and motivated to work in the best interests of the company.
Set out clearly the aims of the business (have an up-to-date business plan) and who brings what to the company (funding/time commitment/other).
Vesting schedule to link equity to contribution to the business (time-based or milestone-based).
Protect minority shareholder interests
Right to a position on the board – appointment and removal of directors.
Decisions reserved for shareholder determination – Unanimous (veto) or special majority required for certain decisions; e.g. issue of additional shares, sale or change in the nature of the business, changes to articles of association, changes to share capital.
Provide a mechanism for departing shareholders
When departing shareholders can retain their shares or are deemed to have offered them for sale to the company or the remaining shareholders.
Should shareholders guilty of fraud/dishonesty or in breach of the shareholders agreement be required to sell shares, and if so, at a discount (bad-leaver)?
Dealings with shares
Issue of further shares and changes in share ownership.
Provision of a right of first refusal for existing shareholders (pre-emption rights).
Sale of the company – the right of majority shareholders to force minority shareholders to sell their shares (drag-along rights).
The right of minority shareholders to sell shares if the majority shareholders do so (tag-along rights).
How shares are valued – fair market value or book value plus goodwill. Value decided by agreement or, in default, by company accountants or independent valuer.
Warranties for incoming shareholders / investors
Common examples are warranties as to good title to shares, disclosure of material assets and liabilities, solvency of the company and accuracy of the accounts.
Specific disclosures by existing shareholders/directors to limit the scope of the warranties given.
Financial caps on liability.
Avoid deadlock – Chairman’s casting vote (possibly rotating each year in the interests of fairness).
Try to resolve deadlock with a cooling off period. If unsuccessful, options include mediation, expert determination, arbitration or, lastly, litigation.
Likely both shareholders wish to acquire the other shareholder’s shares – use of shotgun or Russian roulette clauses.
Failing everything, liquidation of the company.
Distribution of profits
Pre-agreed dividend policy – timing, in which circumstances and percentage of post-tax profits.
Of particular importance when a shareholder is not active in the business.
Minority shareholder’s right to information
Access to company records/accounts including management accounts, cash flow forecasts and business plans.
Confidentiality and non-compete provisions
Restrict the use of confidential company information, including trade secrets.
Provide for reasonable (lawful) restrictions on the right to set up a competing business within a defined area for a defined period of time.