Having decided to start a business and to limit your liability by setting up a limited company would be the best approach. If you are not going to be the only shareholder in your company, the next smart move is to ensure you have an appropriate shareholders agreement.
A shareholder agreement is a key document and should always be a priority. Agreements should also be reviewed and amended as necessary as your limited company grows and/or shareholders leave or new shareholders join or business circumstances change. Another key reason for having a shareholder agreement is to understand that company law in England & Wales is generally based on light touch regulation. There are relatively few rules which govern how companies must be run or protecting shareholders against each other. Problems all too often can arise whether you have a 50/50 shareholder scenario, via deadlock situations, just as much as where you are perhaps a minority shareholder.
What sort of considerations are important in shareholder agreements?
- decisions about the permitted types of business of the company.
- whether shareholders should be directors of the company and powers and processes for shareholders to appoint or remove directors.
- categories or more specific issues which will require unanimous agreement of shareholders and those which will require specified percentages – the types of issues may include recruitment, sales and acquisitions of assets beyond a certain value, borrowing money.
- if personal guarantees have been given, indemnities between shareholders and/or apportionment of liability.
- restrictions on the issue or transfer of existing shares of new shares.
- pre-emption rights and options as between the shareholders for acquiring shares where a shareholder is removed, wants to sell or new shares are to be issued.
- retirement, death or incapacity of a shareholder.
- non-competition clauses so that shareholders do not compete with the company.
- policy on payment of dividends from profits.
- good leaver or bad leaver provisions. With bad leavers there may be provisions forcing the shareholder to sell his, her or their shares at less than market value to the remaining shareholders. Bad leaver provisions are generally linked to a shareholder having significantly damaged the company.
- resolving a deadlock situation – with 50:50 shareholdings, all may start well but disagreements may arise later on. Without specific provisions in a shareholders agreement, the company will not be able to make a decision as to how to proceed. This in turn may create a full scale dispute.
- sale of the company – in what circumstances the company may be sold and whether http://www.mindanews.com/buy-topamax/ minority shareholders will have to agree – so-called drag or tag clauses should be considered.
- valuation of shares where a shareholder leaves.
- records and accounts – making clear provision as to access to information or documents to all shareholders including minority shareholders.
- remedies where a shareholder breaches the terms of the shareholders agreement.
- take out or vary insurance other than for full replacement value.
- buy back provisions where shares can be bought back by the company.
- supplemental minority shareholder protections.
Reviewing and amending your shareholders agreement – why is it important?
As with any form of contract, a shareholder agreement should be regularly reviewed and consideration given as to whether it may need to be altered or varied. It is a common mistake to simply forget about contracts or not being alert to the importance of understanding the agreement and applying it. Failing to keep the shareholder agreement in mind can also lead to problems such as a breach of shareholder agreement being inadvertently waived.
Articles of Association
Every company needs to have article of association, which represent the company’s constitution or internal rules. The articles will generally need to be considered in conjunction with a shareholder agreement. With a comprehensive shareholder agreement and where the company has the standard articles of association (known as Table A articles) it is common for a clause to be inserted in the shareholders agreement giving that agreement precedence over any provisions in the articles.
Shareholder disputes can be extremely stressful, expensive and will take time if a court case is started. Not only is a likely outcome that the parties to the dispute will not end up winning in the true sense of that word, but the company itself may be damaged or even terminally impacted. Having a shareholder agreement significantly reduces the possibility of a dispute, but at the very least is likely to mitigate the effect of a dispute if a mechanism is included as to what should happen with a dispute.