Shareholders’ agreements: issues to consider

Shareholders’ agreements can help manage risks by setting out clear rules for ownership, decision-making and future events.

When a business is first established, shareholders are often family members, friends or long-standing colleagues with a shared vision and common goals.

However, as businesses grow, circumstances change. New investors may come on board, owners’ priorities can shift, and disagreements can arise over the future direction of the company.

Below are five key issues every growing business should consider.

What happens if a shareholder wants to leave?

When relationships are good, it is easy to assume everyone will remain involved in the business indefinitely. In reality, shareholders may wish to retire, pursue other opportunities or realise the value of their investment.

Without a clear exit mechanism, disputes can arise over:

• Whether shares can be sold
• Who has the right to buy them
• The terms on which a departure should take place

Well-drafted shareholders’ agreements should establish a clear process for shareholder exits before they become contentious.

How will shares be a valued?

Even where all parties agree that a shareholder should exit, disagreements often arise regarding the value of their shares.

Questions commonly include:

• Should the shares be valued at market value
• Should an independent accountant determine the price
• How are minority shareholdings treated
• What happens if the parties disagree with the valuation

Shareholders’ agreements can reduce the risk of disagreement by establishing how shares will be valued and who will determine that value if a shareholder exits.

What happens if the shareholders cannot agree?

As a business grows, strategic decisions often become more significant. Shareholders may disagree on:

• Expansion plans
• Borrowing and investment
• Bringing in new shareholders
• Whether to sell the business

This can create particular difficulties where ownership is split equally, as neither party has sufficient voting power to break a deadlock.

Including suitable deadlock provisions within a Shareholders’ Agreement, such as giving a designated individual a casting vote, can help ensure that important decisions do not bring the business to a standstill.

Who can own shares in the company?

Many business owners assume they can control who becomes a shareholder in their company. Without appropriate protections, this may not always be the case.

Share transfer provisions can help regulate:

• Sales to third parties
• Transfers to family members
• Transfers following death or incapacity
• The introduction of external investors

These provisions help existing shareholders maintain control over the ownership and direction of the business.

What happens if the business is sold?

A disagreement over a potential business sale can quickly create difficulties between majority and minority shareholders.

Shareholders’ agreements often include:

• Drag-along rights, which allow majority shareholders to require minority shareholders to participate in a sale; and
• Tag-along rights, which protect minority shareholders by allowing them to sell on the same terms as the majority.

Such provisions can help ensure that a sale process proceeds fairly and efficiently.

To summarise shareholders’ agreements

Shareholders’ Agreements are not simply a document for the early stages of a business. As companies expand, take on new investors and develop more complex ownership structures, it can become one of the most important tools for protecting both the business and its shareholders.

Businesses that review their arrangements before issues arise are often in a far stronger position to manage growth, resolve disagreements and seize future opportunities.

How Can Morr & Co help?

Our Corporate & Commercial team advises businesses at all stages of their lifecycle, including the preparation and review of shareholders’ agreements. Whether you are establishing a new company, bringing in investors or reviewing existing arrangements, we can help ensure your agreement reflects the needs of your business and its shareholders.

If you have any questions or would like any further information on the content of this article, please do not hesitate to contact us on 0333 038 9100  or email info@morrlaw.com.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.