What is a shareholder?

A shareholder is someone who has purchased and owns a share (or shares) in a company (this can be either a Private Limited Company or a Public Listed Company). This is a type of investment with a value which may go up or down dependant on multiple factors, the issue of shares in a company can be for numerous reasons one of these is to raise money for the company to use.

What are their rights?

Share ownership can (but not always) involve the following rights:

1. right to vote (on matters at general meetings or written resolutions)
2. rights to dividends (paid out of profits the company makes)
3. rights to distributions (if the assets of the company are divided up amongst the shareholders when the company is wound up, this allows the shareholder to receive something)
4. right to be redeemed. (This is where the company can repurchase the shares from the holder on a specified date or after an event

Are these rights always applicable?

No, a company may issue numerous classes of share with differing rights. In some cases, as part of using the shares to raise funds, companies choose to issue shares with no right to vote (or limited rights to vote) and in some cases without the right to a dividend. rights to redeeming shares are also used in specific circumstances.

Next time you are looking at your shares in a company, take a few minutes to look into what your shares allow you to do. And if you are wanting to issue shares with different rights for your company, please contact our Corporate Department to discuss. We love to help businesses grow!

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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.

Contact our Commercial team for more information

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The Government has effectively created a new “class” of employee. In return for the acceptance of shares in the employer, the employee forfeits key employment rights including the right to make claims for unfair dismissal, for redundancy payments, the right to make flexible working requests etc and become somewhat second class “employees”, essentially having the rights of a worker but the obligations of an employee.

What’s the benefit? For an employer the benefits are that there will be a reduced risk of employment tribunal litigation. For the employee there is shareholding in the employer without having to “buy” the said shares in the conventional manner.

Key points to note are:

• If this is offered to an employee, they cannot accept for a period of 7 days.
• The employee must obtain independent legal advice; failure to do so will see the person become an employee but will not forfeit their rights. The Employer will be liable to pay the reasonable legal fees incurred in the provision of that advice to the employee, irrespective of whether they subsequently take up the role.
• In addition to the statement of particulars of employment under s.1 ERA, the employee must also be provided with detailed particulars which set out:
  

  o the status of employee-shareholder,

  o the rights that they will give up and

  o details of the rights, restrictions and other conditions attached to the shares.

  o whether the shares have any voting or dividend rights;

  o whether the shares can be bought back or redeemed;

  o whether the shares can be freely sold; and

  o whether certain other rights and restrictions are attached to them

• The Shares issued up to the value of £2,000 can be issued without giving rise to income tax liability, and shares issued up to £50,000 will be exempt from Capital Gains tax. These will only apply where the shares are issued in connected companies, and the HMRC has already indicated that these sums shall be “total values” in order to avoid tax avoidance schemes by issuing multiple contracts and lots of shares.

Employees cannot be dismissed or treated any less favourably in the event that they refuse to accept Employee-Shareholder status. In those circumstances existing employees cannot be forced to accept a such a change.

• Whilst employee-shareholders will forfeit some of their rights, they will still be able to claim for discrimination, unlawful deductions from wages, etc. in the normal way.

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