Shareholders' Agreements & Company Rows

You may think all is rosy in your company but if there's a row, colleagues are suddenly less reasonable than you thought. Shareholders' agreements can help anticipate and cater for problems and in doing so can avoid costly rows and disputes.

Some shareholders are more equal than others

Shareholders may think of themselves as equal partners in their company, even though some have fewer shares. But the minority can be shocked to discover how few rights company law gives them if there's a row; for example if the company changes strategy, or money is being diverted to provide salary or benefits to the majority.

The minority have no rights under our company law to control day to day decisions, to insist that profits be paid out to the shareholders or to buy the shares of another shareholder who decides to leave the company.

Worst of all, the majority shareholders can always remove any director, whatever the director's contract of employment says (though it can be expensive if they sue).

Constructive solutions to key issues

A shareholders' agreement can vary or supplement the company law rules to give greater equality and fill the gaps which are not otherwise covered. Experienced advisors can smooth negotiations, and propose constructive solutions, to agree key issues like:

• The activities the company will carry on.
• Intended 'exit routes' - trade sale, flotation, etc - and when you aim to exit.
• Dividend policy ie the profits to be paid out to shareholders compared to the proportion to be retained to fund the business. 
• Who the board and senior management team will be, their remuneration and other terms of employment.
• Future funding (eg how much each shareholder will put in, whether third parties will be allowed in and on what terms).

Equality under the agreement

The agreement then binds each shareholder to vote to achieve what you have agreed. It may give each a right to veto important decisions, such as:

• Altering the company's share capital or changing its activities.
• Buying or selling a business, or significant assets.
• Buying or selling premises.
• Appointing or removing a director from office, awarding any employee more than a certain salary, or sacking anyone earning more than a certain salary.
• Borrowing above a certain level, or granting a mortgage over company assets. • Entering into capital or hire purchase contracts above a certain level.
• Taking out insurance other than for full replacement value.
• Buying any of the company's shares back from a shareholder.
• Taking action to wind the company up.

Other issues

On an issue or transfer of shares, the agreement may allow minority shareholders a complete veto, or require the shares to be offered to existing shareholders, pro rata. Agreeing how shares will be valued is critical to avoid disputes on transfers later. (see our article on valuing the shares of a departing shareholder).

Agreements may contain a mechanism for resolving disputes, such as referral to a third party expert or arbitrator, or a buy-out mechanism so that, if a dispute can't be sorted out, one side buys out the shares of the other, valued as per the agreement.Agreements can also deal with a wide number of other company issues - for example how profits are to be distributed, protections for the business against unfair competition and 'exit routes'.

Shareholders' agreements require judgment and experience.

To find out more about shareholders' agreements and how they could benefit you or your business contact Troy Warner or telephone 01908 692769.

If however problems have already started to arise under a shareholders' agreement or because of the lack of one contact Trevor Coward or call him on 01908 692769.