SHAREHOLDERS – GET IT AGREED!
Caroline Armitage, partner at Thomas Eggar LLP advises that shareholder agreements are set out clearly in advance to avoid difficulties as the business and circumstances change…
At the start of a new commercial venture or relationship, the importance of a shareholders' agreement is often under-estimated or neglected altogether. A new relationship does not necessarily arise only when a company is formed, but can arise when new investors or employees are given equity in the company. It is important to record the parties' agreed intentions and rights at such a time, for the protection of all the parties. Even if the relationship is older, it is never too late to put in place a shareholders' agreement. Many unforeseen problems can arise in business and the likelihood that shareholders' views may differ when the business is asked to meet difficult or potentially threatening challenges. Any delays in the decision making process of a company will only be to the detriment of the business. There may, of course, be changes in the individual shareholders' circumstances, such as a career change, retirement or even death. In such situations, the remaining shareholders will want certainty as to the future of the business, choice over their future shareholders and an agreed exit strategy. A shareholders' agreement can provide guidance and certainty on all these areas and more. The agreement will be the first point of call when relationships or decisions become difficult. Areas to consider A well-drafted shareholders' agreement will not only set out but will also expedite decisions about the running of the company, saving on both owners' and directors' time. It will provide the directors and shareholders alike with a point of reference, setting out their respective duties and the procedures and remedies if they are breached. Recommended provisions include: • Nature of the business - ensuring that deviations into new areas can be made only with shareholder approval. • Shareholder control - ensuring that each shareholder is represented on the board of directors and imposing restrictions on the way that the business and affairs of the company can be conducted in the absence of shareholder approval. • Share subscription and raising additional capital - prescribing the procedure for the raising of extra capital and the issue of further shares and setting out any rights of pre-emption in favour of the existing shareholders. • Dividend policy - governing the issue of dividends, the basis of their calculation and what level of approval is required. • Restrictions on the transfer of shares - offering existing shareholders control over the identity of future shareholders as well as protection against dilution of their shares or even loss of control of the company. • Restrictions on shareholders - preventing an exiting shareholder from competing with the company or poaching its customers and staff. • Exit strategy – dictating how long the venture is expected to last, in what circumstances any individual may leave, or in what circumstance the majority can force out an existing shareholder. In respect of all these areas, it is far better to agree these matters in advance, rather than wait for the dispute. Bulletin subscription available Thomas Eggar issues regular bulletins for company bosses to support good business practice; subscription is free and available through leon.jackson@thomaseggar.com
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