Shareholders agreements – what you need to know
A Shareholders agreement is a highly effective, possibly critical means of governing the relationship between shareholders and in some cases between the shareholders and the company and of avoiding commercial disputes.
Much of what may be included in a shareholders’ agreement may also be included in the company’s articles of association (“the Articles”). However the contents of shareholders’ agreements are private, unlike the Articles which must be filed at Companies House and are, therefore, public documents.
Shareholder Agreements basics
- a contract between shareholders and/or between shareholders and the company.
- enterprise Management Incentives -this is a tax efficient way to give shares to your employees. Giving employees shares can improve efficiency and reduce absence, as the employees feel they are a part of the company.
- ability to purchase shares linked to profitability of the company, or over a set period of time. You may be considering giving someone shares in your company now, or you may decide that while you want them to have an option to purchase shares now to tie them into the company, you do not want them to be able to purchase shares for a period of time, or until the company reaches a set turnover level. This way the option holder will have an interest in how the company is doing as it will affect the value of the shares when he does get them, but will not be able to benefit from the shares until a future date. After all, a shareholder is a member of a company and will have a say in how it is run.
- ability for other members of the company to buy back shares from shareholders wishing to leave the company or when certain other events occur. For example a lower valuation if an employee/shareholder is leaving after gross misconduct a time limit to force the shareholder to sell the shares within a set period from the event; and the percentages that other shareholders can buy in order to keep, or change, the balance of power. The ability of particular shareholders to veto actions of the company.
- You can use a shareholders agreement to cover all aspects of voting at shareholders meetings. While directors have day-to-day control of the company there are many matters that will need the shareholders consent.
- Requirement for new shareholders to become parties to the shareholders agreement before they are registered as members of the company. While all shareholders are automatically bound by the Articles, a new shareholder will only be bound by a existing shareholders agreement if they have signed a deed of adherence. It is common to prevent the directors registering a new shareholder unless they have signed a deed of adherence.
- avoid future misunderstandings and problems in running the business.
- Require departing employees to sell their stock so that the shares remain with those who have the greater incentive.
- Require the company or other shareholders to buy shareholders shares on a shareholder becoming disabled or dying.
- A venture capitalist who does not acquire control with purchase of company shares will often require a shareholders’ agreement as a condition of funding.
- Management wishing to sells a controlling interest in the company’s shares will normally insist on a shareholders’ agreement to ensure its continued ability to run the company.
The content of this basic guide is for information only. You should never act on the contents of this alone and should always seek professional legal advice regarding any legal issue or business contract before taking any action.