A Shareholders’ Agreement is for the benefit of shareholders (and possibly directors as well) of a private limited company. There is an equivalent for an LLP (Limited Liability Partnership) which is an LLP Members Agreement.
Points for Consideration
Do I need a shareholders’ agreement? That is a question that only you can answer but we would suggest that the answer is “probably”.
Depending on the number of shareholders and directors please consider the following:
- Shareholders and directors will vote on very different subjects;
- Shareholder votes will be based on their shareholding percentages whereas directors will vote on a one vote per director basis.
- Whether the existing articles of association of the company are adequate for your needs. For example, do you want the chairman of a directors’ or shareholders’ meeting to have a casting vote on certain decisions?
- Is it possible to “fudge” directors and shareholder votes? This will not be for everyone but it is a possibility and should be thought through.
- Do you need tag along rights/drag along rights? This would depend entirely on the number of shareholders but if yours is a company with equal 50/50 shareholdings, the answer is almost certainly “no”. However, the option should be considered if only for future reference.
- Do you need to differentiate between contributions and obligations imposed on shareholders and directors?
- Should there be a dividend policy? Again, depending on the set up of the company the answer is “probably” but much will depend on circumstances. However, bear in mind how useful this could be as a default position as the rules in the Companies Act 2006 will regulate whether a dividend may lawfully be paid from time to time rather than whether it should be, which is frequently as much a political decision as anything else.
- Deadlock and Resolution: this provision will be of no use on a daily basis, however if circumstances should deteriorate or the relationship break down altogether then it is sensible and very useful to have a standard objective “deadlock busting” mechanism in place should the relationship between the relevant parties break down altogether”. It is not designed to be attractive, on the contrary it is designed to create a “deadlock mindset” through which hopefully deadlock will be avoided.
In conclusion there is much food for thought and it is well worth considering your options. Please read the case studies below and then book in a free no obligation discussion to take this further? Nick Richardson or Alice Ryder will be happy to speak with you. Call rhw’s commercial legal team on 01483 302000, email firstname.lastname@example.org or complete the easy contact form.
Case Study One: Shareholder Disputes
When clients come to see us about preparing a shareholders’ agreement, the issue of deadlock and dispute resolution crops up. A number of our clients have said that they do not require detailed provisions on this, as they will not fall out.
We had one such situation where clients said that they had known each other since they were children, had grown up together and would never fall out. Nevertheless a shareholders’ agreement was put in place with detailed dispute and deadlock resolution provisions in place.
Needless to say, the clients did fall out and fell out so badly that they could not even agree what time of day it was.
The matter went to court and was eventually resolved. However the point to bear in mind is that the agreement will provide in writing the process to be applied in such circumstances. If there is no such provision, then the two parties (or more) in dispute will simply behave in any way that he or she thinks is appropriate.
Once people have fallen out and are not talking to each other, it is very difficult and extremely expensive to resolve that.
If the legal framework is put in place beforehand, then the process whilst still painful is a good deal more easy to manage and certainly less expensive.
We all hope that a shareholders’ agreement will never be ‘needed’ and once signed can simply be filed away. However, every so often it will be needed and will give the required framework for moving forward and making progress in these difficult circumstances.
Nick Richardson – rhw solicitors llp
Case Study Two: Where Shareholders Fall Out
This case study refers to a situation where shareholders fall out. We normally recommend that a shareholders’ agreement is put in place to provide the mechanism to be applied in such circumstances.
In this situation the shareholders fell out and whilst a shareholders’ agreement had been put in place, nobody could find it!
In this electronic digital age, it may seem unlikely that this could occur but the agreement and the lawyers involved (not us) and the accountants could not find it. There was some basic recollection of the provisions but none of this would in any way be enforceable in court proceedings.
Even if you could find a final agreed version of a shareholders’ agreement agreed by all parties, if this had not been signed again it would be unenforceable.
In this case, even though there was a shareholders’ agreement, it was completely useless as it could not be found. Various attempts at mediation and ‘honest broker’ intervention resulted in a deal being struck. However it was a good deal more cumbersome and expensive – if you go to the time and trouble of putting a document in place, make sure that you keep it!
Nick Richardson – rhw Solicitors llp