Shareholder Agreements

This month David Luoni takes us through the importance of Shareholder Agreements and what they cover.

If you hold a shareholding in a private company, with other shareholders, and don’t have a Shareholder Agreement you should consider entering into one. Considering a Shareholder Agreement forces you to examine your investment and how it will be impacted should certain events occur.  

The same advice applies to new investments in private companies.

Shareholder Agreements operate as a rule book for shareholders covering key matters such as:

·         The agreed nature and purpose of the company.

·         Funding and security arrangements including the provision of any Guarantees.

·         How many directors the company will have, including who can appoint and remove them.

·         The transfer of shares including rights of first refusal (pre-emptive share rights), drag along and tag along rights to cover

majority and minority shareholder rights in the event of a third party buy out.

·         What happens on the death of a shareholder.

·         Share valuations (and the valuation of any realty).

·         A dividends policy.

·         Insurance. For example, some companies take out life cover over a shareholder’s life to fund the purchase of that

shareholder’s shares on their death. 

·         The process for director and shareholder meetings, including notice and quorum requirements.

·         Non-competition and/or restraint of trade requirements to prevent shareholders from competing with the company.

·         Non-dilution provisions which give a shareholder a right to maintain their percentage ownership in a company if the

company issues new shares.

·         Dispute resolution provisions.

Unlike company Constitutions, Shareholder Agreements are private documents, which impose contractual obligations between shareholders to uphold their agreed terms and conditions.

Like most commercial contracts, there is no one size fits all Shareholder Agreement, each needs to the tailored to the company concerned and its business.

If you would like to discuss how we could help you with implementing a Shareholders Agreement, please do not hesitate to get in touch.