Want to survive as a company? Talk to each other first!!

20th April 2017 | Written by Kathryn Paisley

We are often asked to put in place agreements between shareholders of companies.  As you might imagine, these agreements can vary quite widely in volume and structure, in the same way as companies themselves vary widely.  We recommend to shareholders of micro-companies in the same way as we would to shareholders of large regional or national companies that setting down on paper an agreed set of rules that bind the way in which they deal with one another, is a sensible way to proceed in order to prevent potential difficulties further on down the line.

If you are considering setting up a limited company or have been a member of a limited company for some time, we should be very pleased to have a conversation with you as to how we can assist you to set up a shareholders’ agreement between you and your fellow shareholders.

Many people find that the experience of sitting down to consider the potential elements of a shareholders’ agreement is an extremely useful process, particularly if they have not worked with one another before, as occasionally it can throw up issues that they had not anticipated in the early heady stages of discussions about setting up in business with one another.  (We know of one duo of shareholders who agreed during the course of negotiations about the shareholders’ agreement that actually they were not best suited to working together at all, as they both wanted very different outcomes from their entry into business together – their very sitting down to discuss matters saved them both a lot of time and pain over the course of the ensuing years.  We should emphasise that this is not a common situation, but definitely one worth bearing in mind!)

It occasionally surprises people how much thought needs to go into a shareholders’ agreement and so we set out for you below a few points you might like to consider if you are thinking about the possibility:

  • Conflict of interest – it might seem surprising when setting out to do business together that actually it is possible there is already a potential for conflict of interest: what are the  parties’ plans for exiting the business?  Is one older than the other?  Does he or she therefore intend to retire earlier than the other and could that affect his or her intentions in terms of how to build the business and how to depart from it?  Again, whilst it is usually the case that parties setting out in business together have a common goal, it cannot be forgotten that it is possible that their interests are not always entirely congruent.
  • What sort of matters are going to require the consent of the shareholders (as opposed to the directors)?  A new shareholder entering the company? A sale of certain assets? Entry into contracts worth a certain amount of money?  If shareholder consent is required, what sort of percentage? And will this be a percentage of shareholders or of the shares held?
  • What do the shareholders intend to do in relation to share transfers?  Do they want to have the right to acquire the shares of a selling shareholder before that shareholder is allowed to offer them to external third parties?  Are certain transfers going to be permitted, perhaps to family members?  Are transfers going to be compulsory in certain circumstances?  Are minority shareholders obliged/entitled to sell their shares if the majority shareholders are seeking to sell theirs?
  • Restrictive covenants (non-compete clauses) – Are the shareholders going to be restricted from carrying on in a business competitive with that of  the company when they leave?  If so for how long and covering what sort of geographical area?  The enforceability of restrictive covenants has been a matter of interest in the courts for some time now so these require some careful consideration.
  • What about dividends?  Is the company going to be allowed to pay dividends at differential rates to different shareholders or are all shareholders going to be entitled to be paid dividends in accordance with their shareholdings?
  • Who is going to be allowed to appoint directors?  If there are different classes of shares, do they have rights to appoint directors?
  • What about communication?  Most businesses (indeed most people) communicate frequently by email nowadays.  However, many legal documents still restrict communication to paper communication to be valid.  Which would be preferable in your company?

Whilst this is a long way from being an exhaustive list of matters to consider, we hope that it might give you some guidance in the sort of issues that need to be thought through before entering into a shareholders’ agreement.

The corporate and commercial team at Rix & Kay Solicitors LLP would be delighted to assist in drafting shareholders’ agreements, whether your company is large or small, new or old, as well as the articles of association and other documents that are closely linked with them.  Please do not hesitate to contact Kathryn Paisley on 01825 744447 or at [email protected] for further information.