5 reasons why should you consider a Shareholder’s Agreement
Simon Arkell – Principal @ EMW Law
In keeping with ensuring our clients are kept well informed on all things money, investment, tax, and law, we have asked one of our go-to external corporate solicitors to write a short piece on the importance of a Shareholder Agreement if you own a business with more than one shareholder.
We hope you find value in Simon’s views; his contact details are provided at the end should you wish to contact him to discuss any matter you may have.
Why should you consider a shareholders’ agreement?
If you are a company owner, it is always a good idea to consider signing a shareholder’s agreement with your fellow shareholders.
Basic company law covers a lot of things, but the issues discussed here need special attention as the law often doesn’t help you in the way you would want it to.
Below are my 5 key points to consider:
1. Think before you act
If you’re starting out, think very carefully indeed about who your shareholders will be.
It is often the case that business owners assume it will be straight forward to take shares away from people who they have, with the best intentions, previously issued them to.
Unfortunately, company shares are a personal asset and you cannot force someone to sell their shares unless they have agreed to do so beforehand.
Often the circumstances where an individual is forced to sell, or transfer shares can be dealt with in a shareholder’s agreement.
2.Death of a shareholder
Death is a common scenario that causes unexpected problems with share ownership.
If a business partner suddenly dies, without prior agreement about what will happen, the deceased person’s shares will simply form part of his or her estate and the personal representatives of the deceased could become the shareholders.
This might be fine in some circumstances, but more often than not, this is not the desired result and it can be difficult (and extremely costly) to unravel.
Often, shareholders sign an agreement whereby on death, shares can be purchased from the estate of the deceased by the surviving shareholders at an agreed valuation, thereby realising value into the hands of the surviving relatives and drawing a line under the shareholding going forward.
Life insurance often plays its part, to provide the required funds to execute the transaction. All of this provides certainty to everyone involved.
Other situations also arise which give rise to the need for prior agreement.
If you have minority shareholders and a buyer makes an offer to buy the business, a single shareholder could dig their heels in and refuse to sell, scuppering the deal for everyone else.
It is arguably not right that a shareholder who owns a relatively small percentage of the company should be able to prevent the others from realising value, if they want to sell.
In these circumstances, if this situation had been considered beforehand, “drag rights” could have been included in a shareholder’s agreement and used to force the dissenting shareholder to sell to the buyer along with everyone else.
These types of provisions (which are commonly referred to as “drag rights”) need to have been agreed between the shareholders at an early stage.
4. Shareholder rights
Shareholders agreements can also give rights to shareholders that they would not otherwise have.
For example, as a shareholder who is not a director, you are not automatically entitled to receive up to date accounts until the end of the year when you are provided with the annual figures. However, if the parties agree, perhaps as part of an investment, the directors might be obliged by the terms of the shareholders agreement to provide monthly management accounts to the investor shareholders.
In addition to this, some investor shareholders go further and impose a degree of control on the board of directors by including a list of “veto” matters; things the directors cannot deal with or conclude on, without the consent of certain shareholders.
This veto list might typically cover 10 to 20 matters such as taking on new premises, selling assets, recruiting executives or buying another business. Rights such as these give confidence to shareholders that in some circumstances, they must be consulted before the company can act.
Having an agreement in place also provides the shareholders with the opportunity to govern the relationship between the owners of the business and how the company will operate.
Setting the ground rules up front on how many board meetings there will be in any given year, what the nature of the business will be, whether certain shareholders have a contractual right to appoint a director to the board and when (and if) new shares will be issued, avoids the potential for arguments later on.
Often, incurring some fairly modest legal fees up front to give thought to some of these issues and sign an agreement, can avoid costly arguments down the line, if shareholders fall out.
If you’d like more information on this, or any other corporate matter, please contact me at:
- E: Simon.Arkell@emwllp.com
- M: 07843 266 388
- T: 01908 699283
- W: https://www.emwllp.com/
Did you listen?
As part of our Inside Silverstone podcast series we interviewed Simon in 2019 on all things EMW, corporate law, and life working and living in South Northamptonshire.