New director-shareholder joining your company? Time to review your shareholder agreement
If you are planning to appoint a new director to work in your business who will also acquire shares in your company then, as well as drawing up a service level agreement to govern their employment, you will also need to consider whether you need to make any changes to your current shareholder agreement.
As Danielle Austin, a corporate and commercial Solicitor at Geoffrey Leaver Solicitors explains:
‘Among the many things you will need to think about is how much power the new director-shareholder will be able to wield, whether steps need to be taken to prevent the power held by existing shareholders from being diluted, how you can ensure that you have the right to buy back the shares you have issued if the new director-shareholder leaves, and the safeguards you can put in place to prevent them thwarting a future company sale.’
We have a team of corporate and commercial lawyers who can advise you on the steps needed to ensure that the appointment of a new director-shareholder goes smoothly, and that processes and procedures are put in place to deal effectively with their future exit and any possible disputes that may arise about the nature and extent of their role, rights and responsibilities.
We can do this by undertaking a review of your current shareholder agreement and any other relevant documentation, including your company’s articles of association. These should mirror your shareholder agreement to avoid the risk of the two documents containing conflicting provisions which could provide fertile ground for a dispute.
Where you do not currently have a shareholder agreement in place, we can help you to draft one that meets all shareholders’ requirements and protects the company’s interests.
Points to consider when appointing a new director-shareholder
Where you have an existing shareholder agreement, it is important to remember that you can only make changes to this if all current shareholders agree. It is, therefore, important to start thinking about any amendments or additions that you might like to make well in advance of a new director-shareholder being appointed.
Topics for discussion between existing shareholders include:
- what role and responsibilities the new director-shareholder will have;
- any limits that will be imposed on their powers;
- any in-post or post-termination restrictions that will apply, i.e. to prevent them misusing confidential information or from setting up in competition with the company, both while ‘in role’ and for a defined period afterwards;
- how many shares it is proposed that they will receive;
- whether the shares on offer must be bought, or if they will form part of an employment benefits package;
- the nature of the new director-shareholders voting rights and any safeguards needed to prevent dilution of other shareholders’ voting strength;
- whether the new director-shareholder will be obliged to sell their shares back to the company or to the other shareholders if they resign as a director, or if they are fired – which is a particularly important consideration in the context of a family-run business where there is a defined succession plan in place;
- whether a ban should be imposed on the new director-shareholder selling their shares to a third party, including known competitors;
- how the new director-shareholder’s shares will be valued at the point of sale, and if the approach taken to valuation will depend on whether their exit from the business is on good or bad terms;
- whether a drag-along provision is appropriate, so that the new director-shareholder can be forced to sell their shares if the existing shareholders choose to sell the company;
- what will happen to the new director-shareholder’s shareholding if they die; and
- what will happen should the director-shareholder be declared bankrupt.
If you carry out a review of your existing shareholder agreement and decide that it adequately covers all of the above points, plus anything else that you are concerned about, then that is fine. However, it is important to remember that for the agreement to be binding on the new director-shareholder, they will have to consent to be bound by its terms and the usual way to evidence this is for them to sign a deed of adherence prepared by a solicitor.
Service level agreement
To ensure that all of your contractual documentation is aligned, we would strongly recommend that at the same time as updating or revising your shareholder agreement (and articles of association where required), you also make arrangements for the drafting of a comprehensive service level agreement.
This is particularly important where your new director-shareholder will assume a key role within your business. They will have access to confidential and commercially sensitive information that it is in your interests to protect and preserve. Our employment solicitors will be able to assist with advising you in respect of and drafting a service legal agreement for any new director-shareholder.
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This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.