Have you got a Shareholder’s Agreement?
One of the important questions I ask at the first meeting with a new client, assuming that there is more than one shareholder, is if they have a Shareholder’s Agreement. Over the past year I have seen too many disagreements arise, where had there been a shareholders agreement been in place, arguments need not have arisen.
It is not a legal requirement to have a shareholders agreement, but companies with more than one shareholder should put one in place as early as possible when starting up a business.
It is easy to understand that, when you are focussing on getting the business going with like-minded people who are all keen to push forward with the product or service, that the shareholders agreement gets overlooked and is not considered a high priority (it can wait until ‘things’ have settled down). However, views and circumstances change, and they can change very quickly, as inevitably, the individuals will have different priorities when either working in the business or taking time away from the business. This is when problems can start to emerge and if there is no agreement in place, the situation can become disruptive at best and potentially acrimonious.
What is a Shareholder’s Agreement?
The shareholders agreement is a private confidential document and not open to public scrutiny that works alongside the company’s articles of association, but is much more specific to the company itself. Many Articles of association are standard and do not include specific shareholder rules and responsibilities.
Seven key topics to define in a Shareholder’s Agreement.
Seven key topics that can and should be addresses in a shareholders agreement:
- Decision making criteria, and dealing with deadlock if an agreement cannot be reached
- The management of the company – the main business of the company; the appointment of directors and key roles
- Financing the company – current and future finance – who is contributing and how (loan or share capital) – raising future finance.
- Dividend policy – are profits to be retained, if not how are they to be utilised
- Share transfers – right to buy; valuation formula; sale of the company
- Death or illness of a shareholder
- A definition of the shareholders responsibilities (and limitations)
What else can be put in the Shareholder’s Agreement?
There is much more that can be included in a shareholders agreement from confidentiality issues and non competition policies to shareholder meeting guidelines , however, once the shareholders agreement has been drawn up, it can always be reviewed, should circumstances change.
I have seen deadlock situations not being resolved; decisions taking much longer than necessary; and individuals falling out in what was a long term partnership – all of which would probably not have happened had there been a shareholder’s agreement in place.
It is so easy to assume that everything will get on alright, as they do when starting up the business, and that issues will be sorted out as they arise, but for example with 4 shareholders each having a 25% stake in the business, how do you resolve a 2:2 (50%:50%) deadlock?
For more information or an appointment to discuss any aspect of the shareholder’s agreement or compliance in general, please complete the form below.