Why is a shareholders’ agreement so important?

Author: Martin Williams
Martin Williams

Where there are multiple shareholders in a limited company it is important to formalise the working arrangements in respect of the business, and to plan for all eventualities. Creating a shareholders’ agreement is a good way to do this.

Although all shareholders should be pulling in the same direction and acting in the best interests of the company, there are times when this does not happen. The reasons for this being the case can differ greatly.

Many of the day-to-day operational decisions that arise as a result of running a company, including the payment of dividends, can be approved by the directors. Some other decisions require shareholder approval.

Some resolutions just need a majority of more than 50%. Certain, more significant decisions require 75% or even 90% to pass. This can, clearly, lead to issues where there are several shareholders involved.

Whilst a shareholders agreement is not going to direct how someone may vote for any given resolution, what it will do is aid in situations where there is an impasse or fundamental disagreement over matters.

To summarise, a shareholders’ agreement is entered into between all of the shareholders in a company, to regulate how the shareholders must act and react in certain scenarios.

What to address in any shareholder agreement

Whilst any Shareholders Agreement has certain standard elements, each situation is different to the next and so it’s difficult to provide a comprehensive list of topics to address. Below are some key areas that we hope will act as a starting point for any shareholders thinking about putting an arrangement in place.

  • Transfer of Shares – a restriction on a shareholder transferring their shares to another party
  • Sales of Shares – an agreed valuation basis, should a shareholder wish to exit the business
  • Restrictive covenants – limiting a shareholders business activities whilst being an existing member and post exiting
  • Events of Default – What happens to a shareholders shares in the event of death, divorce, bankruptcy etc.?

A well drafted shareholders agreement is worthwhile for any limited company with more than one shareholder. You hope it is not needed, but it is vitally important if things do go wrong.

As professional advisers we have often heard “we’ve known each other for years” and that no agreement is necessary. However, circumstances change and even the best of friends can fall out when business is involved.

Example

A working director owns 50% of the shares in a company. The shareholder unexpectedly passes away and leaves his shares to his spouse. The spouse is now a 50% shareholder of the company and involved in all shareholder decisions. They also have full entitlement to any dividends paid. The absence of a Shareholders Agreement means the remaining shareholders have no right to buy them back. They are also unable to decide how these shares would be valued if the spouse elected to sell.

How can George Hay help?

Please speak to us if you need help with planning for a shareholders agreement, especially where there are several shareholders, where the company has borrowed money from a shareholder or where there are concerns about imminent changes to usual proceedings.

We can assist with share and company valuations and with documenting shareholders wishes, working alongside your chosen solicitor.

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