Shareholder Agreements: a must have for SME shareholders
11 September 2020
Like a marriage, relationships between shareholders can become strained and sometimes the only practical outcome is a separation. In this event, a Shareholder Agreement helps shareholders by providing a pre-agreed process to exit the shareholder relationship. It is similar to a Relationship Property Agreement, but it deals with commercial relationships rather than personal ones.
Shareholder Agreements can also deal with several other important issues such as:
Director and shareholder remuneration.
Company debt and bank guarantees.
Share transfer and sale process, including pre-emptive rights and share valuations.
Dispute resolution process.
Decisions that require unanimous versus majority votes.
Buy/Sell Agreement (due to incapacity or death of shareholder).
Like any new relationship, it is important the parties involved are on the same page and aligned in their thinking. So, the best time to enter into a Shareholder Agreement is when the company is first incorporated. Disagreement during the drafting stage of the Shareholder Agreement can often be an early warning signal the formal commercial relationship is not such a good idea.
A Shareholder Agreement should be prepared by a commercial lawyer, who will often act for the company itself, and each shareholder should also take their own independent advice. New in-coming shareholders are commonly compelled to sign up to the agreement as a condition of becoming a shareholder.
If a company does not have a Shareholder Agreement, many, but not all, of the rules of engagement are covered by the Company Constitution, if one exists. If both a Shareholder Agreement and a Constitution exist, usually the Shareholder Agreement will take precedence over the Constitution. In the case of no Shareholder Agreement or Constitution, the Companies Act 1993 dictates, however it does not cover off some of the issues noted above and does not have the same level of detail.
The Buy/Sell Agreement is usually a separate document. It normally deals with a pre-agreed process to facilitate the smooth exit of a shareholder (usually a working shareholder) who, due to unforeseen circumstances, is no longer able to work in the business. Examples include untimely death or permanent incapacity to perform duties.
Buy/Sell Agreements can help business owners avoid the situation where an exiting shareholder or the family of an exiting shareholder are unable to sell their shares because the other party cannot afford to pay for them. In this situation, the family would have little appetite to have a financial interest in a company they have no day to day input into. Likewise, the remaining shareholders would have little appetite to be in business with the ex-shareholder or their family.
For this reason, it is prudent to have insurances in place to provide funding where remaining shareholders do not have the financial means to buy out the shares. Consideration should be given as to the ownership of any insurance policies, e.g. by a bare Trustee, and a regular review of the share valuation is necessary to ensure your funding strategies and insurances are adequate.
If you would like any assistance setting up or reviewing a Shareholder Agreement or a Buy/Sell Agreement, please contact the Findex Business Advisory team.
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