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5 Key Things to Include in a Shareholder Agreement

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Setting up a new business, or carrying out a restructure of an existing one, is an exciting venture, however there are lots of things to consider. An aspect which often gets overlooked during this process is the drafting of a shareholders’ agreement.

A shareholders’ agreement is a document which governs the relationship between the shareholders of a company and also provides provision for how a company should be run.

Although it is not a legal requirement for a company to have a shareholders’ agreement in place, we would always recommend that you do. This allows you the opportunity to put into writing how you want your company to be run, but also what should happen if things don’t go to plan.

When first starting out, it’s hard to imagine what could go wrong, especially if you are going into business with friends or family. For this reason, shareholders agreements are often an afterthought, which can prove difficult if the relationship between the shareholders breaks down.

Here, Greenaway Scott takes a look at the five key things to include in your shareholders’ agreement.

  1. Retaining Shareholder Power

As the Directors’ hold the majority of the power for the day-to-day running of a company, it is important to outline in the shareholders’ agreement what power the shareholders should retain. This can include, a director having to obtain shareholders’ approval for obtaining further investment. These restrictions on the directors allow the shareholders to limit the directors’ powers in making major company decisions by requiring shareholder approval.

  1. Appointing Directors

The fall-back position for appointing a director is a 51% majority of the shareholders. It is not always favourable therefore that the remaining 49% of the shareholders do not have a choice who runs their company. If this is the case, a shareholders’ agreement may include provisions so that this decision would instead require a majority of 75% majority. This allows a higher majority of the shareholders’ interests to be accounted for and provides them with a choice on who to appoint as a director.

  1. Dividends Policy

One of the main concerns of a shareholder will be how they will receive a profit from the company they have invested in. A shareholders’ agreement should therefore determine how the shareholders are to receive business profits. This is of crucial importance if the shareholders hold varying classes of shares, which have different dividend rights attached to them. Documenting this prevents any disputes arising when dividends are paid.

  1. Protection of Majority and Minority Shareholders

It can often be the case that a company has majority and minority shareholders. This means that the shareholders’ agreement needs provisions which protect minority shareholders from being outvoted on important decisions, including the transfer/allotment of shares. In cases such as this, the shareholders’ agreement can require unanimity between the shareholders. On the flip side, provisions can be included to protect majority shareholders, which prevent minorities from blocking key decisions and resulting in the company being stagnant.

  1. Good / Bad Leaver Provisions

Whilst the shareholders are all getting along, any consideration of a shareholder leaving is not a priority. In this event, a shareholders’ agreements should include both good leaver and bad leaver provisions. This will dictate what price the shares will be sold to the other shareholders when a shareholder leaves. For instance, a good leaver may be a retiring shareholder, therefore may sell their shares back for market value, whereas a bad leaver who is being terminated, could be forced to sell the shares either at market value, or for the price they paid for them.

The above information is just a snapshot of what can be included in a shareholders agreement. If you want any further information on the drafting of a shareholders agreement please get in touch.

The information contained in this article is for information purposes only and is not intended to constitute legal advice. If you require further information or want to have an informal chat about a new or existing shareholders agreement, our corporate team would be more than happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team.