The basis of most business relationships is agreement. Whether a partnership or a company, provided those in control agree, decisions can be made and the business can prosper.
It is when disagreements start that the value of a Shareholder’s Agreement becomes apparent. The content a Shareholders Agreement may vary depending on the purpose or set up of the company but there are some crucial points which are common to nearly all Shareholders Agreements.
Matters requiring consent of the Shareholders
The ability to require the consent of all or particular shareholders to the most important, or expensive, decisions is often part of a shareholders agreement. This is especially important where there is more than one class of shares or where some shareholders are also directors and others merely investors. It can also be used to protect minority shareholdings.
Transfer of shares
Although many of the rules for transferring shares are set out in the articles of the company, it is often useful to use the Shareholders Agreement to elaborate on this. Provisions can be included to dictate the exact procedure and time limits as well as containing restrictions on to whom shares can be transferred.
Events of default
There are some circumstances in which it may be appropriate for a shareholder to be forced to offer their shares for sale. This can be particularly important in a private company in which the shareholders are also the directors and do not wish the shares to pass to anyone outside the company. The most common default provisions are bankruptcy, loss of mental or physical capacity and death, but often it also includes breaching any terms of the shareholders’ agreement, ceasing to work for the company, being involved in a competing business etc.
Issue of further shares
The standard articles used by most private companies provide that new shares must be offered to existing shareholders before they can be offered outside the company. This can be expanded upon either by amending the articles or by including a provision in a shareholders’ agreement to give preference to one class of shareholder.
Smaller companies that tend to have the same people as both directors and shareholders often choose to make it a condition of being a director that they hold a certain percentage of the shares in the company. This can also work the other way so that if a director resigns they are deemed to have offered all their shares for sale. These provisions ensure that the company is run and owned by the same people and prevents expelled directors from continuing to be shareholders and thus entitled to receive dividends.
Deed of adherence
Where a shareholders’ agreement exists, it is usual to make it a condition for anyone becoming a shareholder later that they have to sign to be bound by the terms of the Shareholders agreement.
About the author: Helen Paull is a newly qualified solicitor at Lindleys specialising in company/commercial and commercial property matters.