This article focuses on key clauses that need to appear in a Shareholders’ Agreement. It is usually understood that a Shareholders’ Agreement should be put in place for any company with more than one shareholder, as it provides an ideal solution to any conflict that may occur later on in the relationship. Without one, you would be in a serious mess – for example without one you cannot:
- force a shareholder to sell his or her shares to you if you are in dispute or they breach the agreement or under-perform; and
- force the other shareholder(s) to buy your shares out when you want to retire or if you die.
Without a Shareholders’ Agreement, transferring shares and buying a shareholder out can become difficult, if not impossible; this is especially true when the relationship between the shareholders becomes toxic. Therefore, having a Shareholders’ Agreement can protect both the shareholders and the company.
So let’s look at the four key features that should be in any good Shareholders’ Agreement.
Shareholders’ Agreement clauses
Here is our short-list of essential features:
1. Transfer of Shares
One of the main reasons why someone would have a Shareholder’s Agreement is to protect the interest of the shares of the undertaking, and provide a solution to any disputes that the company may have – disputes often end in one shareholder buying the other out, but you need a clause to provide for this in a sensible way. Having a watertight mechanism for the transfer of shares, including an external valuation if the share price is not agreed and providing for the resolution of disputes, is vital in avoiding costly problems later down the line.
This sort of clause will almost always mean that if someone wanted to sell their shares (for example when they want to retire or do something different in business), they must offer them to the other Shareholder(s) first.
It should also deal with what happens if one shareholder dies. Usually the solution is to oblige the remaining shareholder(s) to buy out the deceased person’s shares at a fair price, as their spouse usually would not want to remain as a shareholder in a private company – this is seen as a risky investment and ties up their assets unfairly. An independent valuation mechanism can be included, to ensure fairness in case the parties cannot agree a value. Again, this sort of clause brings peace of mind and avoids stress, heartache or the spouse being ripped off. It is essential in order to protect your loved ones.
2. Non-Competition Restrictions
This clause places restrictions on what the shareholder can and cannot do, both while the shares are owned and once the shares have been transferred – to restrict the shareholder from setting up in competition, being employed by a competitor or otherwise aiding a competitor for a period of a few years after the transfer of the shares. Without it, once the shareholder ceases to be a director of the company, there is nothing stopping them competing.
This is often seen as needed in order to protect the company’s legitimate interests in its market, i.e. its customer base or ‘goodwill’ value. Without this clause, there is nothing stopping the selling party starting a new business and trying to poach the customers of the old company. On the other hand, you would not buy out the shares of the shareholder who is leaving and pay them a value for goodwill, unless you knew that he or she could not set up in competition right away after selling the shares, so this clause balances both parties’ interests perfectly.
3. Veto List
A ‘veto list’ contains a list of changes that cannot be made to the business without a large majority (or 100 per cent) of the votes in favour. This usually includes a list of important changes, and gives every shareholder a veto to prevent significant changes being made to the business without their consent. For example, this can include changing the name or the nature of the business, taking on large loans or large contracts or changing the company’s constitution. It also protects those holding a lower percentage of shares (i.e. ‘minority shareholders’), as it allows them to have an equal say in key decisions. Without this, those with a higher percentage could do practically anything they wanted.
4. The Right to Appoint a Director
The directors’ role is to operate the company on a day-to-day basis, for the benefit of the shareholders. Having a clause that states how they are to be appointed is important. It should also state how the shareholders can terminate the position of any given director.
Individual shareholder can often appoint themselves (or a nominee) as a director. This can be an important right to protect the Shareholders’ interests. Without such a right in a written agreement, the shareholder may be exposed – he or she may not have access to trading details, like the bank account, and may only get updated once a year at the shareholders’ meeting.
The above four are the core essentials for any Shareholders’ Agreement. Some further clauses that should be considered within the Shareholders’ Agreement are whether you need to set out any specific rights or obligations of the company and the shareholders (e.g. if they are contributing specific assets or services, or if they are responsible for certain functions) and the dividend policy. These other optional shareholders agreement clauses set out what each party can and cannot do in terms of the running of the business.
You can also add extra features to some of the above clauses to help, such as life insurance policies to make buying out a deceased shareholder easy. For advice on how to do this, just contact us.
Take Action to Protect Yourself and the Value of Your business
Now you know what are the most important points that should be covered in such an agreement. This is just a snapshot of the most essential features that should be in your Shareholders’ Agreement and why.
Frankly, a good Shareholders’ Agreement is worth its weight in gold, and will protect all of the shareholders’ interests in the business.
It is designed to assist in any dispute (as well as to help avoid disputes in the first place) and provide a mechanism to resolve it smoothly, without needing to go to court and thus avoiding your wasting lots of time and money, and suffering stress.
Need a Shareholders’ Agreement?
Here at Legalo, we offer a fantastic template Shareholders’ Agreement drafted by expert UK solicitors for a fraction of a High Street Solicitors’ price; we also offer a free guide to our template to help you complete it quickly and easily. There’s also a free helpline in case you need assistance in completing your shareholders’ agreement, so we’ve really got it covered for you.
If you want to know more about the benefits of a Shareholders’ Agreement, we also have a blog post about 5 reasons why your business needs a Shareholders’ Agreement.