Shareholder Agreement Solicitors
A benefit of a shareholders agreement is you can regulate the affairs of the company privately without the public gaze that attaches to articles. You can also impose restrictions on the activities of shareholders both during ownership of shares and after sale of their shares.
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.
Why you would want to work with us
We do handle contentious situations between shareholders and directors always seeking out workable solutions. Some of the benefits we 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. We 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 and juniors will be kept in the background.
Good reasons you need a shareholders agreement
Different companies will have different reasons for implementing a shareholders agreement. Based on past experience we see the most common uses as including:
- Setting out the rights of shareholders
- Managing the compulsory transfer of shares
- Stopping shareholders from blocking the sale of the business
- Bolstering the power of minority shareholders
- Controlling dilution
Using the shareholder agreement to force a compulsory transfer of shares
If an employee or director stops working for the company do you want that person keeping the shares? Retaining shares is often not in the employer’s nor the remaining shareholders’ interests. But, without a shareholders’ agreement forcing the transfer of shares the ex-employee or director will be allowed to retain shares indefinitely.
Cutting down on disputes
In a shareholders agreement there can be a variety of formulas for share valuation. The benefit of pre-agreed provisions is, it will cut down on shareholder disputes. The most common disputes arise over the value shareholders’ can demand for their shares if they either want to exit or are forced to transfer shares under a compulsory transfer provision.
Using a shareholder agreement to prevent a shareholder blocking a transaction
A shareholder can refuse to sell his shares even if other shareholders think the sale is a good deal. This risk can be removed with a shareholders’ agreement.
Bolstering the rights of a minority shareholder
A shareholders agreement can be used to enhance the powers of minority shareholders granted under the Companies Act. In effect, the shareholders agreement can overwrite the Companies Act or the articles of association to give them more rights to all or any of the dividends, voting or capital.
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 quickened via the shareholders agreement. In practice if a director is not performing, delay in removing him can be commercially damaging to the business.
Avoiding conflict with directors
It pays to have considered and to have documented before a dispute arises:
- Which directors are required to be actively involved and who are the decision makers?
- Who determines salary and bonuses?
- Are there certain actions the shareholders need a power to veto? There will be no veto powers unless you have included them specifically in the shareholders’ agreement (or the articles but this is then public).
Shareholder agreements and dilution of shares
Your investment can be diluted without your approval if you have not taken steps to protect your position. Directors and shareholders need to consider dilution carefully and weigh up preserving capital against using new share capital for funding.
Restricting the activities of shareholders
A shareholder does not owe any fiduciary rights to other shareholders. There is only a fiduciary obligation placed on directors. This means that if you do not build in restrictions a shareholder may abuse his position. A way to prevent abuse is to include restrictions on the shareholder in the shareholders’ agreement.
Length of restrictions
The length of time after ceasing to be a shareholder that the restriction can apply does have to match the business needs. But periods of up to 2 years are not uncommon. Different restrictions can last for different amounts of time. We can talk to you have what would be suitable for your business.
Pricing the shares on transfer before exit
The value to be paid on a transfer of shares in a private company where there is no “market” is often an area of difficulty. Often there is little or no published material reporting values of similar transactions.
Using a shareholders agreement to avoid difficulty in agreeing the share transfer value
The shareholder agreement can cover off certain aspects to reduce this vulnerability and set out a pre-agreed formula.
Company buy back
It can be tax efficient for the company to buy back shares from a departing shareholder. The shares bought back are cancelled thereby increasing the percentage of shares held by existing shareholders. The buy back is funded from distributable reserves.
Put and call options over shares
A shareholders agreement gives the parties flexibility to create options over shares. We describe three of the common options below:
1 – Call option for the company to issue shares
Here, a shareholder is given the option to “call” on the company to issue further shares, i.e. create more shares for the benefit of the shareholder. Another variation of a call option is where the company or a shareholder(s) can call on another shareholder to buy more shares. The circumstances in which the call can be exercised are set out in the shareholders’ agreement.
2 – Put option over shares held
With a put option a shareholder or the company can force a shareholder(s) to sell his shares. Like a call option, this option is usually subject to certain conditions. The key condition here is usually price, the fall back being fair value determined by an expert. We do value shares in private companies.
Jointly owned businesses
One of the most complex relationships to disentangle is two 50/50 joint owners of a company. Typically, each is a shareholder, a director and an employee. Each has different rights and responsibilities in each role.
In our experience problems can be avoided if there is a shareholders’ agreement with a dispute resolution clause. The requirement could be that:
- Both parties agree to mediate; or
- Both parties agree to follow a process for the sale of shares. The process can be designed to fit the business.