Shareholders Agreement:

What does it Cover?

The Shareholders Agreement covers:

  • Compulsory transfer of shares on death or incapacity of a shareholder.
  • Ability to acquire the shares of a departing shareholder.
  • A process of agreeing the value of shares to be transferred.
  • Specific Matters on which shareholder consent is required.
  • Deadlock/resolving disputes.
  • Non-compete provisions.

Why have a shareholders agreement?

Life events

  • Unexpected death of a shareholder.
  • Incapacity of a shareholder through illness or other life events.
  • Ability to acquire the shares of a departing shareholder.
  • Wanting to move on – dealing with what happens if a shareholder wants to leave the business.

Shareholder transferring Shares

What if a shareholder:
  • Decides he wants to pass the shares to a family member?
  • Wants to sell his/her shares to an outside third party without your consent?

There should be a mechanism so that the other shareholder/s have first option to acquire the shares at market value.

How to value the Shares of a Departing Shareholder

If a shareholder agrees to sell his shares to another shareholder there needs to be a pre-agreed process as to how the market value of those shares will be assessed.

Without an agreed process there will be a clash of opinion as each shareholder will want a different valuation formula or person valuing the shares according to whether they are selling or buying.

Control

There should be parameters as to what each shareholder can and cannot do without the consent of the other shareholder/s for example, incur expenditure over a given amount or incurring debt, appointing staff or adjusting the salary of a member of staff.

Falling out

Inevitably at some point during the life of a business there will be strain on the business relationship between shareholders.

There needs to be pragmatic ‘first steps process’ to try and get the dispute resolved and if that fails a further mechanism as to what form external help would take.

Protect the business

Non-compete provisions will be needed to stop a shareholder setting up in competition either whilst still a shareholder or when a business owner ceases to be a shareholder. Without a shareholders agreement there is a danger that there could be a falling out and one of the shareholders simply sets up in competition.