Trust and stability are essential pillars for success in business. Corporate Legal Director Philip Miles discusses the top 10 reasons why investing in Shareholders’ Agreements can prove a shrewd investment for businesses with multiple shareholders.
For companies with multiple shareholders, a Shareholders’ Agreement is indispensable. It is a private agreement between the shareholders of a company, establishing their relationship and outlining how the company is managed and governed. It serves as a cornerstone, providing a framework and direction for robust governance and decision-making.
10 reasons why a Shareholders’ Agreement is essential:
- Share Transfers: Ensure continuity and stability by controlling the transfer of shares, safeguarding against unwanted shareholders.
- Death: In the unfortunate event of the death of a shareholder the standard position is that shares will be transferred in accordance with their will/intestacy rules. Maintain control over ownership in times of uncertainty and preserve the integrity of your shareholder base.
- Drag Rights: Without bespoke provisions, in the event of a sale you cannot compel other shareholders to sell their shares. However, you can include a “drag right” in a Shareholders’ Agreement to ensure transfer and smooth the transition of any potential business sales in the future.
- Employee Shares: Preserve company stability by managing the departure of employee shareholders, ensuring the transfer back of their shares with minimal disruption, and determining the price by whether they are a ‘good’ or ‘bad’ leaver.
- Reserved Matters: Align shareholder decisions with company objectives, ensuring shareholder visibility and consent to key business decisions.
- Restrictions on Shareholders: Safeguard company interests with prudent restrictions, securing company value and goodwill. Non-compete restrictions can prevent shareholders from setting up a competitive business whilst a shareholder, and for a period afterwards.
- Director Rights: Establish clear guidelines for director appointments and removals, ensuring continuity of governance.
- Allotments: Maintain equity balance and control with carefully managed share issuances, protecting against dilution.
- Disputes: In the worst case, companies can become unmanageable when disputes arise. Foster resolution over litigation with structured dispute mechanisms and deadlock provisions, preserving relationships and resources when conflict arises.
- Dividends: Promote financial stability and predictability with a well-defined dividend policy, enhancing investor confidence.
A well drafted shareholders’ agreement should dovetail with the company’s Articles of Association to ensure there are no conflicts. Articles of Association should also be reviewed alongside the preparation of a Shareholders’ Agreement for maximum protection.
Contact Philip Miles if you are looking to fortify your company's future. Philip specialises in crafting bespoke Shareholders’ Agreements and Articles of Association that are aligned with your company's unique needs and values.
To discuss any of the above further, please contact Philip: philipmiles@bexleybeaumont.com | 07388 344576
