Why have a shareholders agreement?
Published on Jun 28, 2023
It provides the shareholders with a written document and practical manifesto in which the individual shareholders have an opportunity to discuss, decide, agree, and document the way they want their shareholding, and any future capital investment into the company to be managed. The document gives the shareholders a voice and defines their level of control in the company’s management and operation.
The shareholders in SMEs usually have a more obvious influence than in a large company.
One can make the shareholder agreement simple or complicated. It can cover some or many of all contemplated situations. It can be amended and changed by the shareholders at any time. It is a private document, so it need not be made public. It overrides company articles if that is what the shareholders agree to.
Some of the shareholders may never have previously considered some topics and will welcome becoming familiar with knowing what kinds of matters they can have a say in. A good feeling can result alongside this “buy in” phase because the shareholders know they have been heard and that they are central to the creation of their own document and that they have taken ownership of many potential shareholder company issues.
Some of the matters that can be described in a shareholders’ agreement are:
• to regulate finances, loans and future borrowing;
• to set out the circumstances for the issue, transfer and valuation of shares;
• to ensures shareholders have the first right of refusal of new shares;
• to regulate shareholder meetings, including the quorum, specific conduct and frequency of meetings;
• to reserve certain matters to be dealt with only by the shareholders unanimously;
• to set out a clear policy for payment of dividends;
• to provide added protection for confidential information;
• to contain provisions regarding the board, including board member appointments, the chairman and meetings;
• to contains clauses on what happens to the shares when a shareholder leaves and what is defined as a good or bad leaver in relation to share transfers;
• that a specified shareholder can have options to sell or be a director;
• that a majority shareholder has added access to trading and accounts information;
• to contain an optional drag along giving the majority shareholders the right to force the minority shareholders to sell their shares to a third party on the same terms;
• to contain an optional tag along giving minority shareholders the right, where the majority shareholders have agreed to sell their shares to a third party, to sell their shares on the same terms;
• to set out any specific roles and responsibilities of the shareholders within the company, for example, whether a minority shareholder will have an executive directorship or a majority shareholder will not have an executive directorship;
• to contain non-competition and non-solicitation clauses; and
• to set out specific dispute resolution procedures to follow.
By getting many, if not all the above, and indeed other matters as well, written down in a shareholder’s agreement, the shareholders will be well versed in how the company will be organised and run. They will have peace of mind knowing that the shareholders agreement will be used, followed, and relied upon during the operation and lifespan of the company.
Please do not hesitate to contact Genevieve Mead, Senior Solicitor, Knocker & Foskett, if you have any questions about shareholder agreements or any other company and commercial matters.
Email: g.mead@knocker-foskett.co.uk
Phone Direct Line: 01732 748819