Shareholder Agreement Solicitors
We draft practical shareholders agreements and advise on tax and valuation of shares.
A benefit of a shareholders agreement is you can regulate the affairs of the company privately without the public gaze that attaches to articles.
Benefits of investing in a shareholders agreement include
- 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.
- setting out the rights and responsibilities of shareholders.
- regulating the position between shareholders and directors
- planning for the potential exit of shareholders, new investors joining and where some shareholders 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.
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.
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.
Avoiding shareholder disputes
In a shareholders agreement there can be a variety of formulas for share valuation. The benefit of share valuation clauses is they minimise the risk of 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.
Protecting the rights of a minority shareholder
Shareholders agreement s are very commonly 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 minority shareholders 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 speeded up 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 in the shareholders agreement :
- Which directors are required to be actively involved in the running of the company 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 contractually with the other shareholders. 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 into a shareholder agreement 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 and so a mechanism is needed for share transfer value. The shareholder agreement can cover off certain aspects to reduce this vulnerability and set out a pre-agreed formula.
Put and call options over shares
A shareholders agreement gives the parties flexibility to create options over shares. The common options include :
- 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.
- Put option over shares held – with a put option a shareholder or the company can force a shareholder(s) to sell 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 can advise on valuing shares in private companies.
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.
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.
John solves commercial problems for SMEs and their investors. It is said that he is unbelievably practical and seasoned in finding the right solution without too much fuss. He has an established reputation in the technology, art and media industries.