A shareholders agreement is an agreement between the owners of private company that is limited by shares. The purpose of the document is to regulate various aspects of the ownership of the business, how the business is run and protects the owners on a day to day basis. One key component is that the terms are private between the shareholders / company and there is no requirement to file this at Companies House.
Whilst it is not a requirement to have a shareholders agreement in place, we strongly recommend all our clients with more than one shareholder to have one. What we have recently found is that many funding providers are now making it a condition of any facility that a company must have a shareholders agreement in place – we suspect this practice will become more widely enforced in the future.
But why is this so important?
The divorce
In the first instance (and whilst it is a negative view to take) the terms of the agreement will regulate what will happen should the shareholders “fall out”. Such occurrences or situations are hard to foresee when first embarking, however to plan ahead, consider and deal with ‘the divorce’ can be easier / more cost effective in the long run. Ultimately minimising conflict in this way will prevent the business being in a stalemate position and allow the business to progress.
Many different provisions can be included in the agreement from the share valuations, rights to pre-emption in departing shareholders, linking the shareholding to employment with the company and potential options to further share capital.
The protection
Understandably not all ownership of businesses is split 50 / 50. There is likely to be minority and majority shareholdings in various percentages up to as much as 99.9% shareholding or as little as 0.1%. The terms of the agreement can be drafted in such a way to protect those minority shareholders from being outvoted / prejudiced or in the alternative allow majority shareholders to take action without the entire decision of all shareholders. It is important to ensure that the agreement is drafted correctly and clauses such as ‘drag along’ , ‘tag along’ and other such clauses are considered and where appropriate included.
Company management
The management of a company is not undertaken by the shareholders. Despite common misconceptions shareholders have very limited rights to documents / decision making. It is the directors of the company that make the day-to-day decisions. Whilst in most circumstance the directors are also shareholders this is not always the case.
If drafted correctly the agreement can hold the directors accountable for certain actions and compel the directors to seek the shareholders consent in advance of key decisions – this can include the incurrence of large expense or amendments to governing documents. It is important to take time when drafting the agreement to consider these types of decisions. The agreement is not there to stifle the running of the business but to protect the shareholders interest.
Remunerations / Dividends
A shareholding in a company can be linked to an individual’s employment, their directorship or alternatively a purely separate entity. There are a number of different options in how “profit” in the company can be distributed either by employment contracts, service contracts or dividend policies. It is important however to decide on this process in advance and planning ahead will result in future potential conflicts being avoided.
Confidentiality / Restrictions
Being an owner to a business you will be exposed to confidential information. You may also have silent investors buying into the business who are not “running” the business but there to provide capital. Either way you must look to adequately protect the business during their involvement and or for a period of time after their departure. Restrictions can be imposed to protect intellectual property rights, trade secrets, suppliers, customers and employees from being taken from the company along with restrictions on setting up in competition with the business as a whole.
It is important to get these clauses right early. Unenforceable restrictions or no restrictions at all are very common in our experience and time must be taken to ensure they appropriate. Whether that is non-completion, no “poaching” or a simple confidentiality it is a vital part of the shareholders agreement.
Contact us
Shareholder agreements should be reviewed regularly and amended when the ownership of the business changes. Whether you have a shareholders agreement in place already and need this reviewed or you do not have one at all it is never too late to take the steps now.
If you need to discuss any aspect of a shareholders agreement further, please feel free to contact our corporate law team on 01616 966 229 or complete our online enquiry form and a member of the team will contact you directly.