Shareholders agreements, what are they and do I need one?
24th May 2021
What is a shareholder’s agreement?
A shareholder’s agreement is a private written agreement between the shareholders of a company and, usually, the company itself sets out boundaries between the shareholders and their rights in respect of the company. It ties together the various duties of the individual as director, employee and shareholder – which in law are usually legally viewed as mutually exclusive. It is not filed at Companies House, so no public register is held of them. Think of it as a Pre-nup agreement for your business!
What can they include?
- A Shareholders agreement can require that a certain percentage of the shareholders need to agree for certain actions to be taken (which can be specified to be anything from changing the name of the company/its constitution to borrowing money);
- Drag along and Tag along rights can be established (these require a shareholder to either sell their shares alongside with all shareholders or require a buyer to buy the shares of another holder at the same price/deal as their original intended one);
- Restrictions on what a shareholder who resigns as an employee or director can do (useful if they have been working in the business);
- Bad leaver/ good leaver provisions regarding criteria on the method a shareholder uses to leave a company and how, and at what costs, the continuing shareholder(s) can claw back the leaving shareholders shares.
- Fair value calculation formula
- Pre-emption rights – allowing shares to be purchased by existing shareholders in man circumstance – including death and proposed sales to third parties.
Why do I want to include these?
- Drag and tag along rights can assist in ensuring you get a set price for all of the share capital of the company when you sell your shares. It can be used to stop a minority shareholder being left behind on a sale.
- Shareholder consent can ensure points that matter to you require a certain level of ownership to agree together.
- A restriction on what a shareholder who worked in the business before they left can do regarding the customers of the business can protect the company (and its value to the shareholders from a damaging loss of customers (in many cases it is more effective protection that similar provisions in employment contracts).
- Bad and good leaver provisions can motivate shareholders to agree a good exit or enable continuing shareholders to pay a price they are comfortable with for the shares of the leaving holder.
- Fair value is a formula that allows for a calculation to be performed to value shares for purchase if there is a bad/good leaver.
- Pre-emption rights allow you to protect yourself from being forced to enter into business with an unknown party that you may not get along with by allowing you to have an opportunity to buy other shareholders shares before they can sell them or in set scenarios oblige them to sell to you.
Can I still be a director?
Yes, of course, but you can establish in the agreement that if you own a certain amount of shares, you have the right to appoint (and remove) a director (including yourself).
Can I still be an employee of the company?
Of course, this agreement seeks to bring the roles of employee, director and shareholder together to make them manageable and ensure that the company and your business partners work together with you and be prepared for if you should have a disagreement.