If an individual or a corporate is thinking about becoming a shareholder in a company or indeed, a company is thinking about taking on new shareholders, it is key for all parties to ensure that they understand their rights and obligations to one another from the outset.
A shareholders’ agreement provides the parties to it with a set of rules on how to deal with a range of issues which may crop up in the day-to-day running and management of the business as well as some mechanisms for dealing with more one-off scenarios, such as a shareholder wishing to exit the business or the parties being unable to agree an approach on a certain matter.
In preparing this type of agreement, the parties are given an invaluable opportunity to really focus their minds on their expectations for the company and their investment and accordingly, how they would expect a whole range of matters which may arise during their time as a shareholder or the life of the company to be dealt with. Typical provisions to include would be:
- what each individual shareholder’s roles and responsibilities will be;
- which key decisions, if any, all shareholders will have to agree on collectively;
- which decisions the shareholders are happy for the board to make independently;
- what to do if a shareholder wants to exit the business and what price should be paid;
- how to remove a shareholder if that shareholder is no longer able to act for themselves;
- what to do if a third party offers to acquire the company;
- how to fund the business in the future;
- a dispute resolution process if the parties are unable to agree on major decisions relating to the future of the company; and
- how to close down the company.
As you can imagine, attempting to come to a decision on even simple things when tensions are running high and everyone seems to be at loggerheads will be extremely challenging and so having a set of guidelines in place to guide you will mean that deadlock situations can be diffused or at best avoided and the chances of conflict between the parties can be minimised. Unfortunately, the alternative is to resort to the stressful route of negotiation and if that fails, litigation. Each of these alternatives is often disproportionately time-consuming, emotionally draining and costly for the parties.
Ensuring a shareholders’ agreement is in place should be a top priority when considering entering into an existing business or alternatively, forming one with others. For further information, please contact Sara Carpenter, a Partner in the Corporate team at Rix & Kay Solicitors LLP in the Sevenoaks office on 01732 448302 or email firstname.lastname@example.org.