OwnershipEach shareholder will own shares in the company. They could each own the same number of shares but very often, they won?t. The shares could be split 51/49 or in any other proportions to give one shareholder control and to avoid deadlocks during decision-making. Alternatively, the shareholders may have made different contributions when the company was incorporated, or they may have joined at different times. For example, one may have invested more cash than the others, one may have contributed intellectual property rights, one may be providing specialist services and one may have joined the company later when the riskiest period had past. Each of these contributions may be valued differently and this may be reflected in the number of shares they each own.
ControlWithout a shareholders’ agreement, the law determines how company decisions are made. For example, to dismiss a director the Companies Act says you need a simple majority (more than 50 per cent) to vote in favour of the decision. Say you set up a company and were later joined by three friends. You each own 25?per cent of the shares. If you had a disagreement over the direction the company was taking, your three friends could get together and with 75?per cent of the voting power, remove you as a director. You would remain as a shareholder but you would have no control over the running of the business you founded and may have to sit and watch all your hard work and investment going downhill. A shareholders’ agreement would protect you from this situation because you could agree that a unanimous vote was needed to remove you.
DisputesIt?s inevitable that disputes will arise from time to time. Most of the time they won?t be serious and will be resolved informally. However, if there?s a serious dispute that cannot be resolved, this could lead to the company being wound up. A shareholders’ agreement can help prevent many disputes by giving clear directions on how the company will be run and how decisions will be made. It can also help resolve disputes by setting out a procedure to follow. For example, the shareholders may agree in advance to accept the opinion or decision of a trusted advisor. If the dispute cannot be resolved and the company has to be wound up, the shareholders’ agreement can specify how the company?s assets should be distributed between the shareholders. For example, it may be important to the individual shareholders to re-acquire any intellectual property or other assets they contributed to the company.
Payment of dividendsWhen the business is going well and the company makes a profit, you have three choices as to what to do with the cash. You can either:
- Reinvest it in the company for growth
- Pay off any debts the company may have, or
- Declare a dividend to pay to the shareholders
New shareholders joining and existing shareholders leavingAs a company grows, new shareholders may join and others may leave. The company may need investment or members of staff may be given an equity stake in recognition of their hard work helping to build the business. The shareholders agreement can set the terms on which new shareholder are able to join. If an employee shareholder wishes to leave the company (perhaps to go to a competitor), the remaining shareholders would understandably be concerned about the shareholder having any further involvement in the company. A shareholders’ agreement could require that employee to sell their shares back to the remaining shareholders. These are just a few of the important provisions that you should consider when negotiating the terms of a shareholders’ agreement. As you can see, having a shareholders’ agreement could literally mean the difference between a company surviving or not. Starting a business is an exciting time but it can also be very stressful. Whilst everyone is rushing to get their product to market or service launched as quickly as possible it?s easy to assume that they all want the same thing. The reality can be very different, especially in the long term. In my experience, the true value of a shareholders’ agreement comes from sitting down and talking through all of these issues. Then everyone knows exactly where they stand and this can help prevent future disputes. If you have any questions about shareholder agreements or resolving shareholder disputes, feel free to email me at firstname.lastname@example.org and I?ll be happy to help. Take?a look back at some of our other favourite David Walker articles:
- Why it makes sense to adopt a limited company structure
- What happens when terms and conditions are only signed by one party?
- How to get comfortable having awkward conversations
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