Shareholders Agreements - A guide for UK Businesses
The early stages of a business require supreme effort and long hours, but the rewards are there, working for yourself and owning your business is challenging and satisfying. But there are so many things to do and think about and not enough time to deal with them all. One of the items that often falls to the bottom of your to-do list is a Shareholders Agreement.
You're getting on well with your joint venture partner or investor and legal arrangements can always be done later right? Plus, there are so many other items to spend money on when cash flow is tight.
We get it. But trust us. Putting a Shareholders Agreement in place at the beginning of your venture can save you time, money and relationships in the long run. Here's everything you need to know.
Shareholders Agreement – have one in place from the outset
Putting a Shareholder Agreement in place at the beginning of your business venture will give you a proper foundation upon which to build your business. A straightforward approach on how you agree to deal with each other in a business environment, how you make decisions, what roles each will have can only help not hinder the business. There is also the unwanted possibility that things turn sour, people and attitudes change, things that you thought were agreed by a handshake are not recognised or valid anymore. It is your word against the other shareholders.
Also, things change. One party might want to exit the business. What should happen to their shares? You might find yourself in a position in which you have a shareholder that does not have the same aims or business drive as you or is simply no longer interested in the business. Now, you have, in addition to running the business, the worry of having to sort out what your rights are with the other shareholders.
Shareholders Agreement can be straightforward
A Shareholders Agreement does not have to be complicated – beyond certain standard provisions it is up to the parties to decide to what extent they want to provide for every eventuality. There are occasions when shares rights and exit provisions, for example, will require meticulous drafting and in-depth advice. For small businesses, however, it is common for shares rights and exit arrangements to be straightforward.
Shareholders Agreement – common provisions
A Shareholders Agreement will establish the rules and conditions upon which the shareholders will operate within a company. The agreement will contractually bind the parties, and it is common for any future shareholders to sign up to the agreement as well.
Unlike the Articles of Association of the company, the Shareholders Agreement will not be filed with the Registrar for companies in the UK (Companies House). Your arrangements will therefore remain private.
In general, a Shareholders Agreement will deal with:
Company’s business – describing the business that the company will be undertaking. If a joint venture is being set up for a certain project, what will this be dealing with, its purpose and the participation of each party to it.
Management - how the Board will operate and make decisions if different from the Articles of Association of the Company;
Shareholders’ Consent - any matters requiring the consent of the shareholders whether unanimity or decisions that can only be vetoed by a certain shareholder;
Share rights – the rights attaching to the shares for different shareholders e.g. dividend rights, rights on a liquidation;
New Shares - rights on issue of new shares; any pre-emption rights, for example;
Existing shares - rights on transfer (sale) of shares; any pre-emption rights as to transfers, usually not dealt with in the UK’s Companies Act; valuation of the shares on transfer;
Compulsory transfer of shares - any compulsory transfer of shares provisions, for example upon the death of a shareholder, bankruptcy/insolvency, ceding to be a director, termination of a service agreement with the company, committing a material breach etc.
Restrictions - any restrictions on shareholders, for example competing with the business;
Drag along rights – these rights allow the majority shareholders to sell their stake to a buyer that is only interested in acquiring 100% of the share capital of the company and therefore make it compulsory for the minority shareholders to also sell their stake;
Tag along rights – often requested by minority shareholders these require the majority shareholders to include the minority shareholders in a share sale;
Warranties – may be given by shareholders, for example, around their ability to participate as shareholders in the company;
The above-mentioned points are not exclusive and often clients explain what they have agreed to and would like this to be inserted in the Shareholders Agreement as well. There are things that clients sometimes suggest that cannot be put in place because the laws and regulations that govern companies in England and Wales do not allow them or only allow them if certain conditions are met. A good example is share buybacks that can be made only under certain circumstances and under certain rules.
Shareholders Agreement – our approach
How do we go about helping you implement a Shareholders Agreement? Having spoken with you about your business we usually prepare a first draft, that we then talk through with you to check whether it needs to be expanded or reduced.
We prefer to highlight more and then reduce it, as often, in our experience, clients do not think of certain issues until highlighted.
The cost is not affected by this, it will lead to a more thorough reflection of what the shareholders can achieve. It is always good to be clear from the start what needs to be done and why a Shareholders Agreement is structured in this way. A clear setup leads to clear drafting and a proper explanation of the rights and obligations for the shareholders involved.
If you would like more information or if you would like our support implementing a Shareholders Agreement, Ethiqs will be delighted to help.
Please contact Anca Thomson: firstname.lastname@example.org