On a technical level, the question ‘What is a Shareholders’ Agreement?’ may appear easy to answer; it is a legally binding agreement made between the holders of shares in a company in order to regulate relationships between them,
explains Tom Gibbons, commercial lawyer at Tallents Solicitors in Newark.
A Shareholders’ Agreement sits alongside the company’s constitution documents (which regulate the relationship between the shareholders and the company itself).
However, on a more operational level, it is more difficult to describe what a Shareholders’ Agreement actually does.
Tom continues:
Just as no two companies are ever the same, a combination of factors unique to each company means that no two Shareholders Agreements are ever the same either.
The lack of a ‘one size fits all’ approach means that different Shareholders’ Agreements might deal with different types of issues, and that even where they do handle the same issues they may take very different approaches.
How Shareholder Agreements can help your business
Perhaps the best way to understand what Shareholders’ Agreements actually do is to think about some of the circumstances which can arise and how a Shareholders’ Agreement might be able to assist:
Decision-making and control: In order to retain control over major decisions affecting the company, shareholders might wish to specify a list of certain types of decisions, which can only be made unanimously between the shareholders. This needs careful consideration because if the list goes too far and includes less critical decisions then this can affect the efficiency of the everyday running of the company – while, for instance, it might make sense that all shareholders should agree before charging any assets of the company as security for its debts, it is not feasible to obtain unanimous agreement every time the company needs to order new stock.
Transfer of shares: Shareholders may wish to provide for what would happen if one of them wanted to sell their shares in the company. For instance, if the shareholders were to be left completely free to sell their shares then it would be possible that a stake in the company could be sold to an outsider who the remaining shareholders either cannot or do not want to work with. Many Shareholders’ Agreements contain provisions giving the remaining shareholders a right of first refusal in order that they can retain control. Provisions of this kind always require careful consideration as to how the price would be calculated and when the payment would become due.
Succession planning: Similarly to the points above in respect of Transfers of Shares, the shareholders might want to give some consideration as to what would happen on the death of a shareholder. Many Shareholders’ Agreements make provision for the surviving shareholders to have a similar right to acquire shares of a deceased co-shareholder so as to avoid shares remaining in the deceased’s estate and the possibility that dividends may become due to beneficiaries who do not contribute to the success of the company going forward.
Dispute resolution: It is easy for disputes between shareholders to have a damaging effect on the company and its operations. Setting out a framework in a Shareholders’ Agreement for how disputes would be resolved can be beneficial because, as well as dealing with actual disputes, it can help focus shareholders’ minds on resolving any potential issues before they escalate into disputes. Often a Shareholders’ Agreement might provide that ultimately if agreement cannot be reached then one or more shareholder(s) have a right to buy out the other(s) – the thought of risking losing their shares can help encourage shareholders to be more focused on reaching agreed outcomes.
Some of the key factors which might affect the shareholders’ consideration of the above issues include how may shareholders there are, whether they hold the shares in equal or unequal proportions, the present position and future aspirations of the company and the shareholders’ own personal circumstances.
Peace of mind with a Shareholders’ Agreement
The key to producing a good Shareholders’ Agreement will be for the parties to weigh all of the relevant factors in the balance and to understand all of the implications going forward. By doing so, the shareholders should be in the best possible position to lay out an appropriate framework in the Shareholders’ Agreement.
In one sense, if the management of the company always runs smoothly, then there may never be a need to refer to the Shareholders’ Agreement again. However, shareholders should at least consider the possibility of issues arising in the future.
Protect against potential costs with a Shareholders’ Agreement
The costs of putting in place a Shareholders’ Agreement are likely to be substantially lower than the costs (and other losses) that could arise in the event of a dispute in the future and shareholders might value the additional peace of mind of knowing that there are mechanisms in place should the need ever arise.
At Tallents we can assist in considering shareholders’ concerns and objectives, advising on the possible approaches and drafting and agreeing Shareholders’ Agreements themselves.
In the event that any disputes do arise in future then our specialist dispute resolution solicitors can also assist in guiding clients through the process to secure the best possible outcome.
For more information please contact Tom Gibbons on 01636 671881 or by clicking here.