Getting It Right First Time
Joint owners of businesses are unlikely to see eye to eye every step of the way so having a legal framework in place ensures a sensible way to reach solutions and meet expectations. A shareholders’ agreement can help to set a clear path. Solicitor Emily Steed sets out below a number of provisions that shareholders should consider including in a shareholders’ agreement.
Decide at the outset
What are the plans for the long term? If shareholders have different expectations about how long they intend to hold their shares it can create difficulties.
Plans for funding
How will future funding for the business be obtained? Whether by equity, shareholder loans or external bank debt, differing expectations, and differing levels of willingness to participate, can cause issues.
Share clauses and dividends
Define the nature of the different shares that everyone will hold and what rights will be attached to them. Dividend policy is also important and should be established. Will the company pay out a percentage of its distributable profits each year or will it reinvest them for capital growth?
Decide on the composition of the Board. Which shareholders will have the right to appoint directors? How often will meetings be held? Who will be chairman and will they have a casting vote?
Are there any decisions that the company cannot take without shareholder approval, for example, changing the articles, restructuring the share capital, taking bank loans or buying and selling significant assets?
A standard provision is to have pre-emption rights so that anyone looking to sell, has to offer their shares to existing shareholders first. Should there be exceptions to this rule (i.e. transfers to family members)?
Drag and tag rights
Drag rights allow a majority shareholder to “drag” minority shareholders into a transaction, while the “tag” allows minority shareholders to tag along with the majority when looking to sell shares.
Under some circumstances, such as when a shareholder has done something wrong or left the business, the remaining shareholders may wish to have the right to compel them to sell their shares. There are different mechanisms to set the price at which they have to sell in those circumstances.
Restraint of trade
Shareholders are usually party to sensitive information and it is a perfectly reasonable expectation of shareholders to guard against any shareholder running a competing business, both while they continue to hold shares and for a period of time afterwards.
Even if all the above steps are taken, there may come a time when there is a fundamental disagreement between shareholders which could affect the continuation of the business. Including a mechanism to cover this eventuality can be key to finding a positive resolution.