Shareholder agreement recent experience
The success of any business depends upon how a company is operated. A tailored shareholders agreement drafted in conjunction with suitable articles of association sets out the framework for operation. It is often too late to leave the questions open until trouble is brewing.
Our recent experience with shareholder agreements
We set out below some of the most recent cases we have dealt with to give you a flavour for what we can achieve.
- Drafting a shareholders’ agreement for a start up;
- Shareholders’ agreement reviews;
- Director and shareholder;
- Using a shareholders’ agreement to avoid a deadlock situation;
- Implementing growth shares under the articles backed up with amendments to the shareholders agreement.
Drafting a shareholders agreement for a start up
Equity structure, classes of shares and articles of association
- We set up the equity structure for a start up in digital media. We advised on the use of different classes of shares for founders and investors. Then we implemented bespoke articles of associations and a shareholders agreement.
Tailoring the shareholders agreement
- We drafted a shareholders’ agreement for investors investing in an online technology platform. The investors were concerned at the risk of the founders:
- Working on other projects unrelated to the business which, in turn, was likely to reduce the profitability of the business; and
- Setting up a competing business if they left the business in which the investors were investing.
- To provide suitable comfort to the investors, we drafted a set of restrictive covenants prohibiting the founders from:
- Being able to work on any other business than the one the investors were investing in; and
- setting up a new business in competition with the business the investors were investing. This was until a certain time frame had elapsed.
This provided the investors with sufficient comfort to invest in the company. The business has been so successful, we are now instructed by the current shareholders to assist on its sale.
Shareholders agreement case study examples
Technology business seeking EIS investment
- We reviewed existing articles of association and shareholders’ agreement for a technology business seeking EIS investment.
We then dealt with the requirements necessary to get EIS tax relief. This included ensuring protection for the new investors subscribing for shares under EIS.
Investment into a tech start up
- We reviewed new articles of association and a shareholders’ agreement in connection with an investment into a tech start up.
- Our client, a soon-to-be investor, was concerned with what would happen to the founder shares should the founder die. Our client wanted to avoid the scenario where one of the founder’s family members became a shareholder by default. This would happen following the death of the founder, (who had no interest in the development of the business and could potentially be destructive to the business as a shareholder).
Providing the solution
The solution to this was for a cross-option agreement to sit alongside the articles of association and shareholders’ agreement. Along with this, our client sourced a suitable insurance policy so that if the founder did die, the insurance policy would pay funds to our client. This ensures he had sufficient funds to purchase the founders shares, which he had a right of first refusal on as a result of the cross-option agreement.
Negotiating terms for an on-line travel agency
- We reviewed a shareholders’ agreement and articles of association for an on-line travel agency.
- Our client, a joint shareholder in the company, had the intention of leaving the company shortly after signing the shareholders’ agreement. The shareholders’ agreement provided that should a shareholder leave the business other than under a certain set of circumstances (which would not have been the case for our client), his shares would be purchased back by the company at their nominal value. In this instance it would have been £1. The business had a valuation of circa £20,000,000. Therefore, it was essential that the provisions surrounding a shareholder leaving were relaxed.
We used our knowledge of our client’s business together with our skills of negotiation and successfully negotiated more favourable terms should our client wish to leave shortly after signing the shareholders’ agreement.
Director and shareholder
- We advised an existing founder who was leaving an on-line brand retailer on how to negotiate a good deal for the price received for his shares. We provided ideas on how the business could fund the buy back and cancellation of his shares tax efficiently via staging the payments.
Using a shareholders agreement to avoid a deadlock situation
- We prepared the articles of association and shareholders agreement for a business where the equity was held 50:50. The skill there was to propose a structure which avoided a deadlock situation, which would stifle the business.
Implementing growth shares under the articles backed up with amendments to the shareholders agreement
- We advised the majority shareholder on the implementation of growth shares. Furthermore, we dealt with amending the articles to create the new class of growth share. We also created growth shares to provide the reward of a capital payment out of the sale of proceeds on the exit if the senior team achieved profits above a certain threshold.
- We also reviewed and amended the shareholders’ agreement to build in protection against the senior team attempting to use trade secrets in another business if they left before exit.