In the absence of a shareholders agreement, the shareholders of a company must rely on the company's Articles of Association to regulate the relationship with each other and the company. However although the Articles of Association will govern administrative procedures surrounding shareholder decisions, they are unlikely to influence the day to day running of the business and many other issues that a shareholder will care most about.
Here, Greenaway Scott take a look at the key things to think about when putting a shareholders agreement in place.
A shareholders agreement will set out the rights, responsibilities, privileges and protections and will create a secure relationship between the shareholders. Although it is not a legal requirement to put a shareholders agreement in place, it is strongly advised that you do so if you want to ensure your rights as a shareholder are protected.
The business of the company
A private company can undertake any commercial business that the directors of the company think fit. However, where the shareholders aren’t also directors they may want to limit the extent of the company’s business to what was originally intended when the company was set up. The provision within the shareholders agreement doesn’t need to be absolute and can be drafted so that the business is a specified activity however can be altered with the shareholders’ approval. This allows for flexibility whilst ensuring the shareholders retain some control.
Who makes the decision?
As stated above, it can often be the case where the shareholders aren’t directors of the company which can lead to less control of the running of the business. As the day to day business decisions are often made by the directors, creating a list within a shareholders agreement of those matters which need the consent of 50% or 75% of the shareholders means that those matters which are important to them remain under their control.
Shareholders in private companies are likely to know the business and customers of the company intimately which could be a worry if they were ever to sell their shares and leave the company. The shareholders’ agreement can reduce this worry by including provisions restricting the shareholders from competing with the company during their time as shareholders and for a reasonable period afterwards. These restriction should always be limited in geography and in the scope of the non-compete. The shareholders’ agreement can also include provisions to restrict a shareholders ability to poach key staff from the company.
Restrictions on the transfer of shares
If it is important to the shareholders that they have control over who can hold shares in the company, it could be key that there are restrictions placed on the transferring of the existing shares. Placing pre-emption rights on a transfer means that if a shareholder intends to sell his shares, the remaining shareholders get a right to first refusal of those sale shares. This protects the shareholders from being diluted without their consent, however, it does not entitle existing shareholders to free shares as they would still need to purchase them on the terms the selling shareholder is offering them. If they don’t want to purchase them, they will need to waive their rights of pre-emption so that the selling shareholder is free to transfer the shares to a third party.
Drag along rights
A drag along right allows a majority shareholder of a company to force the remaining minority shareholders to accept an offer from a buyer to purchase the whole of the company. This prevents the majority shareholders not being able to sell the whole of company and allows for an easy exit route where buyers of a target company will want 100% control over the business and will rarely agree to allow minority shareholders to retain a minority shares. Although this may appear to be heavily in favour of the majority shareholder, it ensures that minority shareholders are treated the same as the majority shareholders in any offer to buy.
Tag along rights
Tag along rights are the inverse of drag along rights in that when a majority shareholder sells their shares, a tag along right will entitle a minority shareholder to participate in the sale at the same time for the same price for their shares. These are designed to protect the minority shareholders from being left behind when a majority shareholder decides to sell their shares. It would be difficult for a minority shareholder to sell their 10% shareholding to a buyer as most buyers will want 100% of the company which could result in them being forced to sell their shares at a price which is significantly lower than their actual value.
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 require assistance in putting together a 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.