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Protect Your Business: The Importance of Shareholders' Agreements

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We see it often – a business venture starts off amicably and well-intentioned, then turns sour. And if this is a family-affair or a venture with friends, then matters can quickly escalate into a toxic mess.

But how can you get shares in your company back from someone?

You may be surprised to hear there is no way to force anyone to transfer their shares under the general law. Instead, you would need to look to your company’s articles of association and hope they offer a resolution. But unless they have been bespokely drafted, and are not the standard model articles which most companies default to when they are starting out, you will be disappointed.

A way to protect yourself is to put in place a shareholders’ agreement. This is a private agreement between shareholders which can provide all sorts of protections – such as:

  • who shares can be transferred to
  • whether new issued shares need to be offered to the existing shareholders as well (called “anti-dilution” and is designed to protect your shareholdings)
  • what restrictions do you want to put on key people after they have left to protect the company’s legitimate business interests e.g. non-compete obligations
  • and – most importantly – “compulsory transfer provisions” for where you want to compel an outgoing employee, director or investor to transfer their shares.

This is key, particularly if this is your company and you have issued shares to your employees, investors or your business partners.

The most typical reason is where that shareholder is also an employee and leaves their job with the company. They will be automatically deemed to have given notice to transfer their shares on their leaving date. You can stipulate what price they will be paid for their shares depending on why they have left – have they resigned, were they dismissed or have they been found guilty of misconduct? These are often called “good” and “bad” leaver provisions and the price can be market value or even as low as nominal value. Which for a penny share may not be much.

You might also want those shares back following the death or bankruptcy of a shareholder, or if that shareholder has breached the terms of the shareholders agreement. For example, they may have failed to act in the interests of the company or refused to attend board meetings (if they are also a director). If a director has shares it is important to make their retirement or expulsion from the board a compulsory transfer event, so you can fully exit them from the company.

Another useful trick if you hold the majority of the shares in your company is to be able to compel any minority shareholders to transfer their shares should you be lucky enough to find a willing third party buyer for your business. You can incorporate so-called “drag” provisions into your shareholders agreement to give you this power. This provides comfort for any potential purchaser who may not want a handful of minority shareholders going forwards. And means you won’t miss out on a potentially lucrative exit opportunity.

You can also include any specific requirements you like – such as a dividend policy, specific voting or consent matters or even an order of priority in which the shareholders will get the sale proceeds should the company be sold.

Put simply, this is your greatest chance of clearly setting out everyone’s rights and responsibilities and reducing potential disputes down the line - no matter how cosy things seem right now.

Every shareholders agreement is different, and is drafted carefully to suit you and your business.

Please give Sally, Nick or Lucy a call to discuss this in more detail and see how we can help you.

Call: 01622 759900