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Shareholder Agreements

We can assist you with understanding the details of shareholder agreements

When a business is owned by a company, conflict between shareholders can seriously interfere with the operation of the business, it can devalue the business and in some worst-case scenarios lead to the business’s ultimate demise.

It is always advisable to have a Shareholders’ Agreement from the outset.

A Shareholders’ Agreement can cover a myriad of ownership, management, and succession issues.

Whilst no two Shareholders’ Agreements are the same, it is recommended that they at least cover matters such as how to deal with conflict in the event the parties reach an impasse over any issue.  There should be compulsory dispute resolution processes set out in the Agreement, so everybody knows exactly what they must do to resolve such disputes.

It should also cover what should happen in the event the dispute cannot be resolved.

It should cover how decisions are ultimately made in relation to expenditure, capital acquisitions over a certain value, salary drawings and any other financial decisions of significance.

Employment

Prepare and understand all the areas of concern of shareholder situations

Another area that we recommend should be covered in a Shareholders’ Agreements is succession.  This can address several issues.  For example, if one of the shareholders wishes to exist the business but the remaining shareholders do not wish to purchase their shares, it can often be extremely difficult to find a buyer for those shares.  If you can’t find a buyer then they are effectively worthless in the hands of the person who wishes to exit the business.   A Shareholders’ Agreement can have a compulsory business sale mechanism in it in the event that a shareholder is left in that position.  Either the remaining shareholders buy their shares, or the business is sold.  That way no single person is left with their equity being locked up in the business

The Shareholders’ Agreement should address the process to go through before you get to the compulsory sale process and how you would value the business for either the sale of the business itself or for the sale of the shares.

A Shareholders’ Agreement should also cover what happens to a person’s shares in the event one of the shareholders dies.  This is to avoid ending up in business with a relative of your business partner that you never envisaged being in business with because they inherited shares.

We recommend life insurance cover is taken over the lives of all shareholders. The agreement requires that the death of a shareholder triggers a compulsory sale from the estate of the deceased shareholders’ shares to the remaining shareholders using the life insurance proceeds.  It is therefore very important that the life insurance policies are owned by the fellow shareholders and not the company.

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Whilst these are only some of the matters that can be covered by a Shareholders’ Agreement, these are what we consider to be the recommended minimum. Any Shareholders’ Agreement can be tailored to each particular circumstances.

It is always more economic to spend money on a Shareholders’ Agreement at the beginning of the business enterprise than trying to resolve a dispute later on without one.