The importance of putting a Shareholders' Agreement in place when setting up a new company
PUBLISHED: 12:08 13 April 2016 | UPDATED: 12:08 13 April 2016
Commercial Solicitor, Jeremy Channon, reveals the importance of putting a Shareholders’ Agreement in place when setting up a new company
Shareholders’ Agreements cost money to put in place. For this very reason most clients who I receive instructions from generally fall into the following categories: ‘The Bitten’ - previously bitten by not having one in place; ‘The Insured’ - in connection with a Life Insurance Policy to provide protection for immediate family; and ‘The Smart’ – who also tend to be highly organised. Most clients tend to fall into the first two categories.
Most companies are purchased by new businesses as “off the shelf companies”. The problem is that these companies tend to have slightly basic terms in their Articles of Association which don’t cover many of the issues that business owners often find themselves dealing with later in the company’s lifespan.
There is also another issue with Articles of Association, especially if you are a minority shareholder, in that they can be amended by those shareholders holding 75% or more of the shares. This can result in changes being made to the company, including company finances, which minority shareholders are virtually powerless to stop. A Shareholders’ Agreement can be drafted so that it requires unanimous consent of the shareholders to change it and so it deals with the same issues as are governed by the Articles of Association but in priority to them.
The common issues which Shareholder Agreements’ deal with are as follows:
• Provisions which deal with deadlock in the event of shareholder dispute - including arbitration provisions or the right to buy each other out, it is especially relevant to companies where there is a 50/50 split in share ownership
• The right to purchase the shares of a deceased fellow shareholder (or to force the other shareholders to buy them) in accordance with an agreed valuation method. Often referred to as a “cross option”, it is relevant to situations where the shareholders want to put an insurance policy in place so that immediate family can receive value for their share of the company should the shareholder become incapacitated or pass away
• Protection of minority shareholders (including the right to appoint a director)
• The right to benefit from a takeover offer (conversely this could include the right to be forced to sell but in accordance with an agreed valuation method or to have the right to beat the offer made and purchase the shares yourself).
Whatever your reasons, putting a Shareholders’ Agreement in place at the start of your new company is a smart investment of time and money which will give you and your fellow shareholders a clear understanding of what is expected from the outset.
Get in touch
If you are thinking about putting a Shareholders’ Agreement in place or want to discuss any other director or shareholder related issue then you can contact Jeremy Channon, Commercial Solicitor (LLB Law (Hons)) at MJP Law on 01202 842929 or visit mjplaw.co.uk. MJP Law have offices in Wimborne, Bournemouth, Westbourne, Ferndown and Verwood.