Do you have a business setup with friends or family? Are you sure nothing can go wrong?
What will happen if one of you wants out?
A professionally drafted shareholders’ agreement may seem an unnecessary cost but it can save time and cost should things not go according to plan – for whatever reason, death, disagreement, wanting to exit and the like.
So what does a Shareholders’ Agreement do?
The agreement will:
- set out the shareholders’ rights and obligations;
- regulate the sale of shares in the company;
- describe how the company is going to be run;
- provide an element of protection for minority shareholders and the company; and
- define how important decisions are to be made.
If you are a minority shareholder a negotiated shareholders’ agreement is essential to protect your rights being changed without your agreement.
As a majority shareholder the agreement is necessary to protect you from transfers of shares to parties not to your liking.
A shareholders’ agreement is even more necessary where there are no majority holders to regulate how decisions are made, most importantly, in situations where the parties don’t agree.
Though it is never too late, the best time to put a shareholders’ agreement in place is at the start of an enterprise. If this has not been done then we suggest you get one put in place as soon as you can – where there is a break down between you the other owners it is already too late.
The main elements to consider in a shareholders’ agreement are:
- How and when to issue shares
- When and to whom shares can be transferred – this is usually to give the other shareholders the right of first refusal and prevent unwanted parties joining
- Protections for minority owners – including requiring certain decisions to be agreed by all shareholders.
- How the company will be run – including appointing, removing and paying directors – which will be subject to a Directors’ contract ( which will include restrictions on directors other interests – such as competing with the company)
- When to pay dividends
- What to do to dissolve the company should the need arise
It is possible that the contents of the shareholders’ agreement may overlap with other company documents, particularly the articles of association and Directors Contracts.
We suggest you seek legal advice if you are not sure which provisions to include in which document and to ensure that the documents do not have any contradictory provisions.
What if you work for the business and you’re a shareholder? Do you need anything else? You should have a services contract that protects your rights.
Directors' Service Contract
A Directors’ Service Contract will usually include:
- An hours and place of work clause
- Bonus or other reward scheme– and additional benefits.
- Serious Sickness and Insurances
- Termination and Garden Leave: –reasons for dismissal e.g. fraud, disrepute, bankruptcy etc
- Right on Resignation – compensation etc.
- Confidentiality clause and property protections
- Restrictive Covenants
- Director indemnity
What about the Articles then? Are they useful or necessary?
So what are Articles of Association?
Basically the articles of association determine the rules for running your company. They are the company’s governing document and give the rules for doing things like appointing and removing directors, making decisions, the rights and duties of shareholders and directors, etc
Most new companies use the standard Model articles issued by Companies House. What matters most is that the articles are consistent with the Shareholders’ Agreement.