Shareholder Agreements

Notwithstanding competing financial demands on a start up or growing business, a key investment for a private limited company should always be a shareholder agreement. This is because standard articles of association cover only a small number of common and important legal and practical points which can create risk and disputes as companies develop and things change.

Why you would want to work with us

Some of the benefits our lawyers offer include:

• We have seen and dealt with a great number of shareholder agreements over the years. This gives us experience to share with you.
• We act for large and smaller businesses. Our lawyers have the skills to know what is reasonable in your circumstances and what goals are likely to be achievable.
• In all cases your matter will be run by a partner.

We are highly experienced in drafting, reviewing and advising on shareholder agreements. Our lawyers are highly practical and cost effective, ensuring you get what you need to protect your interests and provide clarity.

Main benefits of a shareholder agreement

For the vast majority of private limited companies, there are many good reasons to have a shareholder agreement, including :-

• a shareholder agreement is a key way to regulate how the company will be run, the rights of shareholders, restrictions on rights and agreed processes for important issues.
• a shareholder agreement is private whereas articles of association (amending the articles is sometimes an alternative to a shareholder agreement) is a public document.
• a shareholders agreement can include restrictions on the activities of shareholders after sale of their shares. This is important because In many small businesses the shareholders are also directors and sometimes also employees.
• regulating the position between shareholders and directors. The directors have day to day authority for running the company and so limits can be placed on authority. Director disputes are quite common.
• planning for the potential exit of shareholders, new investors joining and where some shareholders may want to sell the company
• avoiding shareholder disputes

Please do call us if you have a question or need your shareholders agreement reviewed. We are always happy to provide a scope and estimate.

Key clauses in a shareholders agreement

Different companies will have different reasons for implementing a shareholders agreement.  Based on past experience we see the most common clauses including:

• Who will do what – in many small privare companies the shareholders work in teh business. Establishing roles, time commitments and whether the shareholders are intended to have an active role is essential.
• Managing the compulsory transfer of shares – for example where a shareholder is an employee and they are dismissed, bad leaver clauses will deal with what will happen to the shares.
• Drag along rights – wherey minority shareholders are stopped  from blocking the sale of the business where the majority want to sell.
• Bolstering the rights of minority shareholders – There are many areas of risk for minority shareholders if basic rights are not enhanced. As 1 example, if minority rights are not bolstered, the majority shareholder could bring in new shareholders regardless of the views of existing minority shareholders
• Veto rights against  issue of new shares generally and/or new classes of shares
• Put and call options
• Good leaver and bad leaver provisions
• Policy on paying dividends from profits
• Controlling dilution
• What happens if there is a dispute between shareholders and/or a dispute with directors
• Restrictions and limitations on directors – limiting the ability of unilateral decisions by a shareholder who is also a director to commit the company to borrowing, employing staff or entering into important contacts.
• Rights to information – giving shareholders specific rights to information such as management accounts and other data to provide ongoing visibility of how the company is doing.
• Illness, death, incapacity, incarceration – setting out what happens to shares on the death, incapacity, criminal liability or bankruptcy of a shareholder.
• Mechanism and procedures to resolve shareholder disputes – will often include a procedure whereby if sharehodlers cannot agree, there will be a mechanism, including valuation mechanism, for a buy out.
• Resolving deadlock – If there are 2 shareholders and the each own 50% of the shares, what happens if they disagree and end up in deadlock? A shareholder agreement can include a resolution mechanism.

Using shareholder agreements to manage directors

You may find it impossible, or at best difficult, to remove directors if you have not secured this power in the shareholders agreement. The process under the Companies Act can be speeded up via the shareholders agreement. In practice if a director is not performing, delay in removing him or her can be commercially damaging to the business.

Get in touch with our experienced and practical lawyers today. We are known for being proactive and for giving you what you need without legal waffle.