A shareholder's agreement is not a legal requirement in the UK but whilst they are commonplace in Private Equity and Venture Capital transactions they are rarely seen in private companies. It is our professional opinion that whilst it may never be used the Shareholders Agreement protects each shareholder from any unwanted “What-If” scenarios and is an essential tool for business. We have seen in numerous cases where disagreements that could have been clarified through a Shareholders Agreement has led to lengthy and costly legal disputes.
The contents of the binding document may vary but traditionally will include the following common provisions:
Shareholding rights and obligations:
- The number of shares each shareholder holds and the rights and restrictions associated with those shares.
- The right to receive dividends and whether you have a specific dividend policy or whether this is left to the Directors.
- The ability to realise your investment, are you able to sell the shares to a third party or do you have to offer them to other shareholders in priority.
- If selling the shares, the price at which you can sell them, whether a fixed formula or whether “market value” is defined by an expert.
- The Agreement protects the company's trade secrets and prevents shareholders from competing when they leave the Company.
Decision making
- The ability to appoint Directors.
- Establishes the roles and responsibilities of the company's management and the powers that can be delegated to them.
- Provides a framework for decision-making such as can decisions be made by a simple majority of the shareholders or do certain decisions need a unanimous vote.
- The process for resolving disputes between shareholders so as to avoid costly and time-consuming legal proceedings.
- Minority shareholders may be vulnerable to being overruled by the majority shareholders. A shareholder's agreement can include provisions to protect minority shareholders' interests, such as requiring a certain percentage of shareholder approval for major decisions.
A well-drafted shareholder's agreement should reflect the needs and goals of the company and its shareholders and should provide a clear and comprehensive framework for managing the company's affairs. The Pierce Corporate Finance Team can provide expert advice and knowledge if you are looking to introduce a shareholder's agreement to your business.