When entering into a legal relationship, whether that is buying a house or having a kitchen installed, you want to know exactly what you are getting and that it is worth the money you are spending. When you are investing your time and money into building a business you need to ensure you know who has what powers and rights in the Company and what will happen if something goes wrong. Here at Carter Bond we are here to help.
What is a Shareholders’ Agreement
A shareholders’ agreement is a private contract entered into between the shareholders of a company. It regulates the relationship between the shareholders and the management of the company, setting out how the shareholders should act in relation to their shares. It also governs the way in which the company is run aiming to promote the running of the company in good faith. Shareholders’ agreements are often used as a safeguard and to give protection to shareholders.
Absence of a Shareholders’ Agreement
If a shareholders’ agreement does not exist, then the disputes will have to be governed by the articles of the company. However, most companies have standard articles, which are not always suitable, may not offer enough protection and are limited in their scope. The absence of a shareholders’ agreement increases the potential for disagreements. Shareholders’ agreements contain provisions that pre-empt disagreements and set out ways for disputes to be dealt with.
Without a shareholders’ agreement there is a lot of uncertainty as to what can and cannot be done with shares in a company, and any issues can become very difficult and expensive to resolve. Below is a list of 5 things that can go wrong without a shareholder’s agreement:
1. Decision making
There are many decisions which directors of a company can take without reference to the shareholders. The shareholders’ agreement put restrictions onto the directors that prevents certain decisions being taken without the shareholders’ consent. For instance, directors have a general power to take day to day decisions such as entering into contracts and transactions, dealing with insurance policies, dealing with employees and can also appoint other directors. The shareholders’ agreement gives the shareholders more comfort that their investment will be managed well.
When starting out in a new business venture or joining an existing company it is easy to think that there will not be any problems, and there may well not be. However, in the situation that something goes wrong, a shareholders’ agreement will set out a process of how to resolve the dispute without the need to resort to legal advice. The Agreement gives a clear process on how to handle a dispute and resolve a dispute, without matters becoming unnecessarily expensive.
3. Death or Incapacity
In the unfortunate event that a business partner passes away or is considered mentally unsuitable to be a shareholder, if there is no shareholders’ agreement in place a number of issues can arise, for example: the surviving shareholders may wish to purchase the shares of the deceased shareholder but the executors of the deceased shareholder may not wish to sell them. Leaving open the possibility of the widow/personal representatives being involved in the running of the business, or the right to appoint themselves as director. The executors of the deceased shareholder’s estate may want to sell the shares to the remaining shareholders, but they may not be able to afford it, and then the shares could be sold elsewhere. So having a shareholders’ agreement will contain a mechanism for the automatic transfer of the shares. This allows the remaining shareholder(s) to buy the shares, preventing a person who was not envisaged and/or unsuitable coming into possession of those shares. The shareholder or their estate will get market value for the shares, making the transfer fair whilst protecting the business venture and the investment.
4. Wanting to sell
If a shareholder decides they do not want to be a part of the business anymore and wants to leave, the shareholders’ agreement sets out the mechanism to transfer their shares. Without such clause, a shareholder who leaves the company may be able to sell their shares to anyone, leaving the remaining shareholders running a company with someone they don’t know, or the other shareholders could refuse to allow the shareholder to sell his shares. Firstly, the remaining shareholders will have the right to buy the shares, and if they decide not to, they may be sold to a third party at the same value. This protects the remaining shareholders in the event that they do not want an unknown third party joining the company, however, does not restrict the outgoing shareholder in the event that the remaining shareholders do not want to buy the shares.
5. Wanting to accept an offer (Drag & Tag)
If your business becomes very successful, or is attractive to another business, an offer to buy the company may be made. Often in this situation the buyer will want to buy all the shares. The shareholders’ agreement will provide a mechanism in that if over 50% of the shareholders want to sell they can require the remaining shareholders to sell their shares. Alternatively, if not all of the shares are being bought, and the remaining shareholders do not want to enter into a business relationship with an unknown party, they can require the majority seller to also sell their shares.
A few other advantages of having a Shareholders’ Agreement
As highlighted above, there are a host of advantages for having a shareholders’ agreement in place, below are some of the main advantages:
· gives a contractual remedy; and
· helps address issues before they arise by setting out a structure for the sale or transfer of shares. For example, the shareholders’ agreement can provide for what happens if there is a ‘deadlock’.
Our solicitors are able to help and advise you on shareholders agreements when entering into a business or entering into a shareholders’ agreements after your business has been incorporated. For further information or if you require our assistance please call us on 0203 475 6751.
The material/information contained herein is believed to be correct at the time of circulation. These notes are prepared for general interest only, therefore it is important to obtain professional advice on specific issues. No responsibility is taken for loss occasioned by any person acting or refraining from acting as a result of the material/information contained herein and no responsibility can be accepted by Carter Bond or the author.