- The so called 'mum and dad' type companies. Although a separate legal entity, in reality these companies are the trading entity of a self employed person. They usually have one director and one or two shareholders,
- Companies where the shareholders are at arm's length, and have come together to pursue a common business interest. These are commonly referred to as 'closely held companies'.
- Inter-generational business ownership e.g. father/son
- Ownership by family e.g. sister/brother
- Ownership by friends, often having a common interest in the business
- Companies formed to undertake a specific venture
- Established businesses where the owner is bringing in a successor
- Existing businesses where the owner wants to reward employees with some shareholding but wants to retain overall control
- Can regulate rights and obligations before incorporation of the company
- Is usually confidential
- Can protect shareholders' rights from any alteration without the shareholders' consent
- Sets out the parties' intentions from the outset and in doing so the shareholders will inevitably address and consult over a number of key issues
- Regulates entry, exit and control
- Is uniquely-tailored to the shareholders and the company, rather than being a generic document as frequently the case with constitutions.
- Who will the directors be?
- Who can hire and fire directors?
- Do different shareholder groups have a right to appoint a director (or two)?
- How are directors removed? What is the retirement/rotation policy?
- Will shareholder groups always have a right to have a director representing their interest? Given that directors control the day to day running of the company, the make-up of the board and its ability to control appointment or removal of directors is vital.
Share purchasesDo the shares have to be paid for straight away or may payment be delayed? Is a share purchase a pure cash arrangement or are goods and/or services provided in lieu? In the latter situation, the transaction value must be recorded. Voting rightsDo all shares have an equal vote? Is there more than a 50% majority required to pass a resolution? How many shareholders are required for a quorum? It is common for each class of shareholder to have a say in each shareholder vote as well as each class of shareholders being represented at a vote. If shareholders refuse to attend a meeting, are there to be provisions allowing their votes to be discounted? Exit strategiesA shareholder agreement should have provisions governing the exit of one or more shareholders. These provisions will cover issues such as:
- Can a shareholder be compulsorily bought out, or can one shareholder require the others to buy him/her out?
- Procedure to value the shares
- Will the departing shareholder be subject to a restraint of trade? If so, for how loi and what geographical area and industry is involved?
- Will the pay out be in one lump sum or spread over time? A lump sum often places a great deal of financial pressure on a business. Pay out over a term is reasonably common. If this occurs, will the departing shareholder get security for the money owed?
Dispute ResolutionFinally, a shareholder agreement should include a dispute resolution process.A common approach is to use mediation which is extremely cost-effective. If there is no resolution, this is followed by arbitration. Mediation in particular can be a valuable tool where the parties are unable to agree on how to resolve their differences.
- Entry into the company and the terms on which a person becomes a shareholder
- Governance and control
- Exit arrangements.
A shareholder agreement need not be lengthy and complex. Many shareholder concerns can be addressed in a reasonably short document. In going through this process shareholders will discuss potential issues and make at least some provision to cover them. The alternative is an agonising stalemate which will be costly and time consuming, and can ultimately cause a company to fail.