Shareholders’ agreements are strongly recommend in closely held companies to regulate the affairs of the company and the relationship of the shareholders. There are a number of provisions one would expect to see in such a document and these are listed below.
It is usual to agree and state whether the company will be funded by equity, shareholder loans or external (i.e. bank) finance (or any combination of these) and how any future requirements are to be met.
The agreement should cover procedural matters such as how directors’ meetings should be conducted (i.e. quorum and notice requirements, frequency, if there is a chairman and whether they have a casting vote). The agreement should state which shareholders have the right to appoint and remove directors.
Shareholders’ reserved matters
It is usual to set out a list of decisions the company cannot take without shareholder approval, e.g. restructuring its share capital, issuing shares, taking bank loans or buying or selling significant assets.
The shareholders’ expectations as to dividends should be included (will the company pay out a proportion of its distributable profits each year or reinvest all such profits in the business).
It is common for a company to have multiple classes of shares, with each class having different rights. Matters to cover may include voting rights, rights to dividends, any preferential rights and rights to proceeds on exit.
Transfer of shares
Generally, shareholders in a closely held company will not want another shareholder to sell shares to a third party who has not been approved by the others. It is usual to include pre-emption rights so that anyone wanting to sell their shares has to offer them to the existing shareholders first.
Drag and tag rights
Drag rights allow a shareholder with a majority holding to drag minority shareholders into an exit transaction. A tag right allows a minority shareholder to tag along with the majority when the majority sell.
Compulsory transfer provisions
Where shareholders want to compel a shareholder to sell their shares (e.g. an employee shareholder who resigns their employment), it is common to include ‘good leaver’ and ‘bad leaver’ mechanisms that will dictate the price at which the leaver must sell their shares.
Restraint of trade
Any shareholders going into business together will expect that fellow shareholders are not running a competing business on the side – this should be prohibited by appropriate (and reasonable) restraint provisions.
If a fundamental disagreement exists between certain shareholders and it is of such fundamental importance that it is disrupting the business, the agreement can provide an exit mechanism to ensure a resolution.
For further information about this article, please contact Jon Healey, Legal Director in the Corporate / Commercial team at Raworths Solicitors on 01423 566 666 or email Jon at firstname.lastname@example.org