As a well-established professional firm managing hundreds of businesses, we have encountered numerous situations where having a shareholders’ agreement would have saved time, money, energy, and a great deal of stress. Therefore, for those of you operating through a company, this serves as a reminder of why your business needs a shareholders’ agreement.
What the law says
For limited companies, Company Law dictates that shareholders who own more than 50% of the shares can pass a motion at a company meeting, regardless of the opinions of other shareholders.
What’s more, if a shareholder or a group of shareholders owns 75% or more of the shares, they have complete control over the company. They can veto the decisions made by all other shareholders.
This approach may not be suitable for all business situations, particularly when there are two or more founders with equal share capital or a group of owners who hold different amounts of capital.
In some cases, some owners may be directors while others are not, yet all work together towards the company’s success. This is why your business needs a shareholders’ agreement. It is there to protect every shareholder in case of any future disagreement.
What is a shareholders’ agreement ?
A shareholders’ agreement is a valuable contract formed among some or all shareholders of a company. It serves to clarify and strengthen the relationship between shareholders while providing a framework for effective management of the company.
This agreement outlines the ownership of shares and includes important measures for protecting shareholder rights. By establishing guidelines for how the company is run, the shareholders’ agreement ensures a collaborative and transparent operational environment that benefits all parties involved.
A shareholders agreement can clearly define how a business makes decisions that benefit all owners. It is especially recommended in situations where:
- A small number of owners seek to make collective and fair decisions that benefit everyone.
- Some owners may wish to have a say in decisions that directly affect them.
- Additionally, some shareholders may not hold director positions and, therefore cannot influence day-to-day operations.
It typically addresses the three “D’s”:
- death,
- disability
- disagreement
Additionally, it may encompass other important areas, such as retirement and share buybacks.
Some key areas for any shareholder agreement
Here are some common areas a good shareholder agreement should cover. This is not a comprehensive list, as each situation is different, but it may help you collect the thoughts of all shareholders before you draw up an agreement.
- Company details, including structure, directors and officers
- Purpose and aims of the company
- Equity split of shareholders
- Parties to the agreement
- Shareholders rights, obligations and commitments
- Decision making processes on significant issues, required voting majorities and day-to-day operating decisions
- Restrictions on the sale of shares
- Rights of first refusal and pre-emptive rights to acquire shares on leaving, retirement, death or disability
- Death, disability and other retirement compensation payments
- Management contracts, director approval and remuneration amounts
- Insurance and other protective requirements
- Professional advisers and change of professional advisers
- Dispute resolution
- Changes to and termination of the agreement
- Buy out provisions for leaving shareholders
- Valuation of shares on changes and valuations of the business
What should you do next?
Our view is that every agreement is individual to each set of shareholders and legal advice is generally advised. Shareholders can draft their own agreements using resources such as those provided by online document providers, such as simple docs
There are also several providers of online forms, but nothing beats good, solid legal advice and help in drafting the agreement suited to your circumstances. We are happy to recommend lawyers if you don’t already work with your own.
A well-prepared and comprehensive agreement can safeguard minority interests. It also clarifies decision-making authority and will provide flexibility in the event of situations such as retirement, death, disability, or disagreements.
Many clients believe they will never need it, but disagreements between business partners can arise unexpectedly. Additionally, death and disability can strike without warning. Therefore, it’s important not to leave this matter to chance. As you enter the New Year, take the time to consider this if you haven’t already.
We are serious about you and your ambitions, and in our view, a shareholders agreement is an essential document for any limited company. One that is equitably drafted and would provide comfort to all parties should the inevitable happen.
It is vital if one of you is thinking about selling your shares or passing them to your children.
Myers Clark has advised numerous clients on how to care for their business shareholders and has extensive experience in this area. Please email your usual contact first if you want to proceed further.
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