Why it’s important for business owners to have a Shareholder Agreement...

A Shareholder Agreement is a private agreement between the shareholders of a company regulating decision making and offering key contractual protections. The absence of a Shareholders Agreement can leave a company open to the potential for disputes between the shareholders.

Key points to consider...

Share transfers

An important part of any Shareholders Agreement is what happens should a shareholder want to exit the company. That could be voluntarily, due to a transfer event (such as death, ill health or gross misconduct) or through a buyer for the whole of the company being found (drag and tag rights).

Should there be a right of first refusal (known as pre-emption)?

A usual provision in a Shareholders Agreement is pre-emption rights on share transfer. These offer the remaining shareholders the right to acquire the shares from an exiting shareholder first. This can prevent a co-shareholder selling their shares to a competitor or other person whose interests may not be aligned with the company.

Good leaver or bad leaver provisions

A Shareholders Agreement can establish the price for which shares are to be sold at in the future. This can be dependent on whether the exiting shareholder is a good leaver or a bad leaver based on the reason for why they are leaving.

For example, it may be fair that a shareholder leaving due to ill health should get full value for their shares. Alternatively, if they are a bad leaver (i.e. an employee dismissed for gross misconduct) their shares could have limited rights and a discount may be applied to the value of the shares. Good leaver provisions can encourage shareholders to act fairly towards each other and with the company’s best interests in mind.

Restrictions

These can help protect the company and each shareholder’s investment in the business. Shareholders usually do not want their co-shareholders competing with them while a shareholder and for a reasonable period after exiting; particularly if they have paid significant money to buy them out.

Restrictive covenants and undertakings may look to prevent shareholders from:

• being involved in a competing business

• soliciting and dealing with customers and suppliers

• poaching employees

• using the business’ intellectual property

• disclosing the company’s confidential information and trade secrets 

Regulating decision making

The agreement can set out the roles and responsibilities of shareholders and whether each person is expected to work full time in the business. It can also restrict key decisions being made, or key contracts from being entered into, without key shareholders or a certain number of shareholders agreeing. It may also set out that shareholders have the right to receive key information (such as monthly management accounts) and set out the process for agreeing an annual business plan.  

Deadlock – what happens when shareholders disagree?

Disagreements between shareholders can prevent important decisions from being made and can be a significant disruption and barrier. A dispute resolution procedure can reduce the time in resolving the issue and encourage shareholders to engage in good faith. Such provisions may ultimately set out how shareholders may exit a company if the dispute is not resolved.

If you are considering putting in place a Shareholders Agreement for your business or have any questions regarding the operation of an existing Agreement, please contact us on telephone 0116 212 1000 or 01858 445 480, alternatively complete the free Contact Us form and we will get in touch as soon as possible.

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