Do I really need a Shareholders Agreement?

Lizandra Bailey at Fortune Manning

If you are thinking about becoming a shareholder in a company with others – the answer is usually yes.

Many people think that a Shareholders Agreement is not necessary because they are not likely to have any issues. Well if you use the analogy of a relationship – you may start off in love but when there are issues it can be very expensive to sort them out. In this way you can think of your shareholders agreement as your prenup.

Another reason people think a shareholders agreement is not required is because of that piece of legislation called the Companies Act 1993. Surely that provides the rules that we need? Wrong! The Companies Act 1993 only has very limited provisions which deal with what happens when things go wrong.

A shareholders agreement not only deals with what happens if there is a problem between the shareholders but it can also be helpful for other reasons:

• It can provide a process for the sale of shares by a shareholder – who can a shareholder sell too, must the shares be offered to an existing shareholder and for what value? There may also be a period during which shares cannot be sold.
• Restraints of trade – a shareholders agreement can contain provisions which prevent shareholders from competing with the company both during and after the period during which they are a shareholder.
• Minority shareholders may want to have additional rights – for instance there may be certain decisions which the company can only make if all shareholders agree.
• The shareholders agreement can contain provisions which deal with the company’s future funding requirements – what happens if personal guarantees are required from the lender, who is required to give these?
• Shareholder advances – the agreement can document these, any security that the company provides to the shareholders for the advances and the terms of repayment.
• If the company is obtaining life insurance in respect of its shareholders/directors then the agreement can contain the provisions around the requirements to have the insurance and what happens to the proceeds.
• The agreement can record the agreement of the shareholders in relation to the distribution of profits.
• The shareholders may want special provisions which apply if a third party wants to buy a shareholder’s shares – for instance, the third party can be required to purchase all of the shares in the company if the other shareholders require this (tag along rights). It can also provide that if a third party wants to purchase all
• of the shares in the company than all of the shareholders must agree to sell their shares to the third party (drag long rights).
• Other types of provisions which can be included are call options – where one shareholder has the right to buy another shareholder’s shares or put options which require a shareholder to sell their shares in certain circumstances.
• The shareholders may want to have control over who is going to be a director and the agreement can contain limitations on the rights of the shareholders to appoint and remove directors.
• If a shareholder/director plays a vital role in the operation of the business the agreement can provide what happens when that shareholder/director leaves – do they have to sell their shares? Can the other shareholders sell their shares or require the business to be sold?
• Decision making – the agreement can contain specific provisions as to who makes what decisions.

There is no one sized fits all Shareholders Agreement. A shareholders agreement must be tailored to meet the circumstances of your company. Think of your shareholders agreement as an investment – an investment which could save your shareholders money.

Contact Lizandra Bailey at Fortune Manning if you would like more information about Fortune Manning's Fixed Price Packages for Shareholders Agreements.

Article Source: BuyaBiz