We have likely all heard of a ‘Shareholders Agreement’ but how much do we really know about why they are useful and how they can benefit your business?
What is the Purpose?
The Shareholders Agreement (‘the Agreement’) documents the relationship between the individual shareholders and should deal with matters such as dividends and also matters requiring the consent of all shareholders. The Agreement can also deal with and should incorporate matters such as the sale of shares and restrictions on outgoing shareholders.
Why the importance?
Shareholders will find themselves having to make decisions on a daily basis, sometimes all the shareholders will be in agreement and sometimes only the majority will be. The Agreement should document and dictate the types of decisions that require a unanimous decision or a majority decision. This is a key part to any Agreement and is often viewed as the fairest way to treat all shareholders when it comes to the decision-making process.
It is also important to set out the provisions for exiting shareholders, how this will be dealt with and any restrictions which may apply.
In the absence of an agreement, how are decisions made? What restrictions (if any) are the shareholders bound by upon exiting the company? What happens upon a shareholder’s death if there is no Agreement in place? What is stopping repercussions affecting your business if there is no agreement in place? Greater weight is given to a Shareholder’s Agreement than an employment contract for example so it’s providing crucial additional protection.
What is a cross-option agreement and why would it benefit me and my business?
A Shareholders Agreement does not necessarily incorporate the transfer of shares in the event that a shareholder passes away. Should a shareholder pass away, their shares would pass to their next of kin or any other individual nominated within their Will. Would you volunteer to work with the spouse or relative of your ex-colleague and former shareholder? Very few would but for some, this is a real possibility if cross option agreements, in addition to an insurance policy, aren’t adequately put in place. Put simply, the cross-option agreement means that the shares (upon death) have to be sold to the existing shareholders in return for a sum of money that is paid by the insurer into the estate.
A cross option agreement is an important tool for any shareholder who wants and needs business to continue as normal in the unfortunate event a shareholder passes away.
Why your company should have a Shareholders’ Agreement
- Shareholders are only human and do disagree; Disputes arise all the time and all too often, hindsight is a wonderful thing. At the beginning of a business venture, the last thing you tend to foresee is a scenario in which you or one of your business partners fall out or find it near impossible to make a decision. Why risk waiting until a dispute arises? Formalise your approach to conflict of opinions and follow a procedure, this can easily be addressed in a shareholders agreement.
- The Directors run the company, they aren’t necessarily shareholders; As is often the case, the day to day running of the business is often left to the Board of Directors, but they aren’t necessarily always shareholders. There may be instances where it is more appropriate for shareholder approval to make a call on a decision affecting the business as opposed to leaving it to the Directors discretion.
- Protection for minority shareholders; Certain decisions can be reserved and must be dealt with on a unanimous basis as opposed to a majority basis. This provides the minority shareholder with protection from majority decisions being made about important factors that will affect the running of the business.
- Controlling the transfer of shares; Who doesn’t want a right of first refusal? With a shareholders agreement there is an easy mechanism to ensure that if one shareholder wishes to sell their shares, the remaining shareholders have the right of first refusal.
- Link the shareholdings to the shareholders employment; Very rarely would you ever want a shareholder to continue receiving dividends having resigned or left the business. A shareholders agreement is the perfect way to ensure that the shareholder leaving the business must offer their shares up for sale prior to departing.
- Restrictions protecting the company’s interests; The restrictions existing in the Shareholders Agreement can be stricter than those contained within an employment contract. For obvious reasons, this can be invaluable when looking to protect the interests of the business.
- Dispute Resolution; If a dispute has arisen and is subject to a procedure, it’s more likely to be resolved. This in turn causing as little disruption to the business as possible which helps to ensure the continuity of productivity. It is important that these dispute resolution procedures be addressed within the Shareholders Agreement.
Michael Lewin Solicitors has a dedicated commercial team who are happy to advise you or your business on any company/commercial queries you may have. We understand that you don’t know what you don’t know and you can only foresee circumstantial scenarios within reason. With our assistance, you could cover all bases and have the peace of mind that should the worst happen, there is either a resolution or a procedure in place to deal with it.
Should the above be of interest to you, you can discuss matters further with our Director and Head of Department, Richard Coulthard or email RichardCoulthard@michaellewin.co.uk