Top 10 Reasons to have a Shareholders Agreement in Place
A shareholders’ agreement is a useful tool in recording the intentions of the shareholders of a company. It is a contract between the shareholders that governs the management of the company and focuses the minds of the shareholders on the pertinent issues within a business. Unlike Articles of Association, a shareholders’ agreement is a private document.
We have compiled the top 10 reasons that your business would benefit from having a shareholders’ agreement in place.
- Minority shareholders rights
- Majority shareholders rights
- Manage share transfers
- Customised dividends policy
- Employee shareholders
- Restrictive covenants
- Death of a shareholder
Unfortunately, shareholders often have disagreements. If a shareholders’ agreement is not in place, the shareholders will have to rely on the Articles of Association and company law. This could mean costly litigation which will waste both money and time to the company in the event of a dispute. Whereas a shareholders’ agreement can stipulate a cost effective and timely method for resolving issues.
If shareholders are in a deadlock position, it is very difficult to get anything done. A shareholders’ agreement can address the stalemate by giving one of the directors a casting vote.
At the outset of any business relationship, it is useful to clarify who can make certain decisions. A statement of reserved matters can be included in a shareholders’ agreement. This is a list of important matters that can only be decided upon with consent of all, or a particular group of, shareholders.
This is particularly important for minority shareholders who may otherwise have very little say in how a company is run.
A shareholders’ agreement can include ‘tag along rights’ which allows minority shareholders to join onto a sale of shares owned by the majority shareholders, on the same terms and price per share.
If a majority shareholder gets an offer from a third party to purchase their shares, they can force the minority shareholder to sell their shares too. This makes the company more attractive to potential purchasers as they will be able to buy the entire interest in the company. This means that a minority shareholder cannot frustrate the sale of a business.
Shareholders may be reluctant for shares to transfer to unconnected third parties. The agreement can include pre-emption rights for the shareholders, which means that if a shareholder wishes to transfer their shares, the shares must first be offered to the existing shareholders.
The agreement can also state that shares must not be transferred within a certain time frame from the date the agreement was signed. This can be used to show investors stability within the company.
The agreement can outline that different classes of shares are entitled to different dividend values.
A shareholders’ agreement can link shareholding to employment status. The inclusion of good leaver/ bad leaver provisions directly impacts the price of the shares. For example, if an employee is dismissed and is deemed to be a bad leaver, they will be forced to sell their shares for their nominal value. Whereas an employee who retires for reasons other than dismissal could be deemed a good leaver, and they would get the market value for their shares.
The shareholders agreement can place confidentiality, non-compete and non-solicit obligations on the shareholders. This will protect both the company’s interests and the interest of the other shareholders.
The shareholders agreement can stipulate what happens when a shareholder dies. For example, a shareholder may wish for their shares to pass to a family member on their death, or they may wish for the shares to be purchased by the company or the other shareholders so that their loved one will get paid a good price for the shares.
If you are considering putting a shareholders’ agreement in place for your business, please do not hesitate to contact Sarah or Amira.