What are typical matters dealt with in a shareholders agreement?
Shareholders Agreements generally aid in managing and minimising risk, when it comes to internal conflict arising between management. Shareholder agreements define and outline the roles and responsibilities of the parties involved, through a formal written contract.
Drafting such an agreement is beneficial, as it starts a conversation between shareholders about expectations of the business. Common issues are listed below:
- What happens if a shareholders leaves/dies/becomes ill
- Shareholders’ rights to appoint directors
- Voting rights
- Dividend policy
- Transfer of shares
- Valuing shares in the event of a transfer/sale of those shares
- Restrictive covenants
- Drag and tag along rights on the sale of the company
- Minority shareholder protection
What if there is no shareholder agreement in place?
Whilst it is not mandatory to have such an agreement in place, we strongly advise that any business with two or more shareholders should have such an agreement in place in order to protect the parties and the company. If an agreement is not in place, there is little general common law that can help protect the shareholders. As a consequence, if a dispute arises it can be costly to resolve.
Shareholder agreements don’t prevent every dispute, but they can be a useful tool in avoiding difficulties later on in life. They are invaluable where shareholders in a business wish to have an exit plan, which the other shareholders agree in advance. It also protects the business in the event that a shareholder leaves under difficult circumstances or joins a competitor. It is essential that shareholders reach a formal agreement at an early stage, highlighting any potential problems in advance.
Frequently people can embark in business with the belief that they are in agreement, thinking they do not need formal contracts, only to regret it when disagreements arise.
What do shareholder agreements provide to businesses?
- Restrictions on shareholders selling shares. Without such restrictions, a shareholder can freely sell shares, which may result in remaining shareholders being in business with someone they do not approve of
- The ability to force shareholders to sell shares to others. This can be useful if there is a shareholder who is not pulling his weight, commits wrongdoing, or in the event of death or bankruptcy
- Determination of the correct price to be paid for shares should a shareholder wish to leave the company
- Restrictions on new shares, which could change proportions in which shareholders own the company, or bring in new shareholders
- Rights of shareholders to nominate a director of the company
- Restrictions on the way a company does business, e.g. in the spending of sums or committing to contracts, or employing staff
- Restrictions on what shareholders may do outside the company. These restrictions may apply for limited periods after someone ceases to be a shareholder, thus providing the company and shareholders with some protection against competition
What happens if the shareholders simply cannot agree on issues affecting them and the company?
There are provisions in shareholder agreements for breaking deadlocks.
What are the usual clauses in a shareholders agreement?
- A restriction on the transfer of shares, including a right of pre-emption before a shareholder can transfer to a third party.
- What happens on the death or bankruptcy of a shareholder
- How the value of the shares is determined
- The activities the company will carry on in
- Any agreed exit route and timescales
- Any company dividend policy
- The make-up of the board of directors and senior management team, their remuneration and other terms of employment.
- Post termination restrictions on shareholders preventing them from poaching clients, suppliers or other sensitive information.
- Levels of borrowing
- Future funding
Tag along rights?
A tag clause protects the minority shareholder from being left behind when a majority shareholder decides to sell. It enables other shareholders to force the selling shareholder to make it a condition of sale that the buyer must buy the shares of the other shareholders at the same price, and on the same terms.
Pre-emption rights are in relation to the percentage of shares already held by the shareholder who is exercising its rights. Pre-emption allows a shareholder to protect themselves by preventing a shareholder from selling or transferring shares to another party whom they may not wish to be in business with. It essentially gives the existing shareholders the first right to purchase the shares.
Who Should Enter into a Shareholders’ Agreement?
It is advisable that you enter into a shareholder agreement, if any of the following are applicable to yourself or your business:
- If your business has two or more shareholders
- If you are setting up a new company or starting a new business with others
- If you are buying a business with others in a new company
- If you are acquiring shares in an existing trading company, whether new shares or from another shareholder
- If you are selling shares or transferring shares to others in your company, whilst retaining a shareholding
- A shareholders’ agreement will ensure that your investment, interest and, control of business is protected and the business can be run in a fair and profitable manner
What are some basic tips for new business?
- Market research: Of course the first thing you need to decide is what is your business going to be? This will involve some market research to identify whether the business idea you have has any potential. You need to look at that particular market, what the customer base is like, whether there is too much competition, whether the market is thriving or has growth potential and whether there is room for your business to expand in future years with new products or services.
- Business Plan: A business plan is the main document that will assist you in forming your own business. In compiling this you will answer yourself a lot of the questions that need answering. You will be able to set out what your goals will be and how you intend to achieve them. Your business plan will also define your business structure, how you are going to attack your market and how you expect to make money. This document is a key step and is often used to secure finance from a bank or other guarantor, as it shows your business is credible, professional and has secure potential.
- Finance: An accountant will be able to help you with budgets and working out what kind of capital you need to start your business, and then to see it through the first uncertain period before you expect to start making money. It may be that you need to consider corporate finance or grants and you may need separate advice on this.
Location: Choosing the right location for your business is critical to its success, unless you are running an online business where the location is irrelevant. However, location needs to be an early consideration as it can affect profitability, competition and finances. You have to think about your market, i.e.. Where your customer base is; can they find you? Is there any competition around you?
- Business Structure: While this will have been defined in your business plan, there are legal formalities you have to go through in order to formally establish your business, and these differ according to which structure you decide upon. Get professional help on this, but certainly the structure you choose – sole trader, partnership, limited company etc – will most likely be an obvious choice from the outset.
- Red tape and legal formalities: Depending on the industry or market you are entering you may need certain licences or permits in order to be able to trade, such as alcohol licenses or food hygiene certificates. You also need to register with HMRC for tax purposes, and you need to look into intellectual property law, employment law and public liability insurance.
- Marketing: Your trading name is a legal requirement but this also needs to be marketable and to work effectively as your brand. It has to stand out and represent you in the best way. Think about your website, securing domain names, think about your social media profiles, logos and branding and think about whether your name is future proof and will enable you to effectively expand and diversify.
- Premises: Of course this goes hand in hand with location, but your premises as an actual building have to work for the business. They may be the public face of your business or they may just be an office that nobody sees, but either way they are critical to your success. Think about location, but also practicality, ergonomics, ease of parking and access, rent and rates and do the premises allow you to expand as you plan to?
- Capital investments: Apart from premises, this can include stock, machinery and equipment, a website domain, computer hardware, office fixtures and fittings and this all needs to be budgeted for and sourced cost-efficiently.
Typical legal steps for a start-up business?
Of course some of these topics and actions will be less relevant depending on the size and structure of your business. But typically, we offer the following advice to people starting out on the exciting journey of owning their own business:
- Deciding on the best formal structure for your business: i.e. freelancing, sole trader, partnership or private limited company;
- Companies House: finding an available name and registering the business if you are a private limited company;
- Drafting Articles of Association and/or Shareholder Agreements as your internal ‘company rule book’
- Appointing directors and formally recording this;
- Issuing shares to raise capital and registering shareholders;
- Applying for trademarks and patents and the costs/time involved;
- Drafting ‘terms and conditions’ for your product or service to define clear rights for both parties and liability when things go wrong;
- Data protection responsibilities;
- Employment Law responsibilities: this involves a whole range of considerations if you are employing people straight away- amongst the elements you need to look at are statutory leave and sick pay, HMRC tax registration, employee liability insurance, health and safety policies and equal opportunities policies;
- Property related matters such as business leases or the purchase of business premises.
How much will fees be?
It is not possible to give one set fee as our advice takes account of your individual circumstances. Fixed fees however are available for most situations and we take account of the value of the transaction to ensure our fees are proportionate to the issues involved.