A Shareholders’ agreement is a private contract between you and your fellow shareholders containing the rules for running and owning the company.
In it’s most basic form it is similar to a simple partnership agreement but for a company instead. It will usually state the shareholders’ respective share ownership, restrict the transfer of shares and state shareholders’ and directors’ authority levels for making company decisions such as when the business and assets of the company can be sold. There is no standard form of Shareholders’ agreement so they are flexible to fit your needs. Shareholders’ Agreements can specify that further agreements will be entered into between individual shareholders and the company such as: directors’ service agreements (employment contracts), transfer of business premises to the company, supply agreements to or from the company, management agreements or technology agreements (e.g.IT or IP transfers or licences, Patents, Trademarks, Copyright or Software agreements). This ensures that all necessary legal arrangements are put into place at the same time, for your protection/the protection of your business.
Shareholders’ Agreements closely relate to the company’s Articles of Association. All companies have Articles of Association but companies are not legally required to have a Shareholder’s Agreement. Articles of Association are filed at Companies House when the company is first formed and they set out the administrative and company law procedures affecting your company. Importantly they should set out the classes of shares and the rights to vote, dividend entitlements and return of capital on a winding up of the company. Some issues that can be dealt with in a Shareholders’ Agreement could instead be included in the Articles of Association and vice versa. We use our experience to advise you which is appropriate. Often the deciding factor is privacy (a Shareholders’ Agreement is a private document).
Q. What if I want to sell my shares or what if another shareholder wants to sell?
We recommend that you ask us to write in suitable provisions to set out when and to whom shares can be freely transferred (e.g. to close family) or when shares must be offered first to the other existing company shareholders. This would usually be if a shareholder wants to sell to someone other than the existing owners or if a shareholder is dismissed as an employee or director (in accordance with their employment contract).
Q. What about new issues of shares?
Well drafted Articles of Association will make it clear whether or not any new shares need to be offered first to the existing shareholders pro rata to their existing percentage holding of shares (so they can maintain their respective percentage shareholdings, voting power and dividend entitlements)
Articles of Association can also set out whether the company has the right to buy back shares and cancel them by a particular date ‘Redeemable Shares’ or whether the company merely has the power to buy then back for cancellation providing the selling shareholder agrees.
A Shareholders’ Agreement and Articles of Association should be prepared at the inception of the company and then reviewed as circumstances change. For example:
- when taking on or losing an important shareholder
- when a venture capital company wishes to invest
- when you want to provide an employee share option scheme such as Enterprise Management Incentives. EMI’s are share options which have tax advantages. They can help your company recruit and retain employees to help the company grow and succeed (we prepare and advise on EMI’s)
- to take advantage of more relaxed administrative requirements in the Companies Act 2006. These help you pass resolutions more quickly and they avoid confusion with old rules. Many companies have Articles of Association which pre date the coming into force of the Companies Act 2006 (phased in between 2006 and 2009). The Companies Act 2006 abolished: Extraordinary General Meetings; the requirement to have a company Secretary; Authorised Share Capital; and Annual General meetings. Old articles of association have unnecessarily restrictive articles requiring continued consideration of old regulations.
Q. Are you confident that your existing Shareholders’ Agreement and Articles of Association protect you?
To give you peace of mind we offer a Company Constitution Review service to check your Articles of Association and Shareholders’ Agreement. We often find that Articles of Association are prepared by company formation agents at a time when the founders of the business do not have the time or inclination to consider many of the points mentioned above (so for example if you are unlucky, they may not restrict your fellow shareholders from selling to whoever they want or they may not allow you to appoint an alternate director to vote on your behalf at board meetings). Prevention is better than cure and it is better to know what the position is now so that you have a chance to agree with your shareholders to replace the old articles with ones which are fit for purpose before they think about selling.
If your articles need updating we will take the time to advise you and to listen to your requirements so we can take the best of the new 2006 Companies Act Model Articles and then modify them to suit your needs (eg to insert a special article permitting share transfers only if a selling shareholder has offered them to the other shareholders first). Once we have had an initial discussion we can usually give you fixed price quotation for your Company Constitution Review.
Q. How do I protect the family and other shareholders if I die?
Your Shareholders’ Agreement or Articles of Association can provide that when you die your shares are offered to the other shareholders at a fair price. A life policy can be taken out to pay out to the other shareholders so they can afford to buy your shares from your estate. Similar arrangements can be made for the other shareholders.
We can prepare your Will so that it sets out, in a tax efficient manner, what will happen on your death to your shares and your other assets. In doing so we carefully check that any restriction on the transfer of your shares (contained in your Shareholders’ Agreement or Articles of Association) is taken account of so you avoid making an ineffective legacy of shares to someone to whom the shares cannot be transferred.
Q What happens if I lose capacity to act for myself (e.g. if I am seriously or suddenly ill for a period of time, for example, after a road accident)?
It is very important to make a Lasting Power of Attorney ‘LPA’ and register it with the Office of the Public Guardian so it is ready for use if you lose capacity to deal with your own affairs (e.g. you have an accident or illness). Your LPA appoints people you trust to look after your legal and financial affairs and avoids the necessity a lengthy and costly application to the Court of Protection.
An LPA would enable your attorneys (who are legally obliged to act in your best interests) to sell your shares if that is best for you (e.g to get a better sale price) or to vote on your behalf at a company shareholders meeting convened to change the constitution or wind up the company. The Court of Protection is slow, an application for a Deputy to act on your behalf is expensive -the delay could mean your buyer withdraws or the company constitution may be changed to your detriment.
We are experienced in preparing Shareholders’ Agreements and Articles of Association and would like to help you. We look forward to your enquiry.