Businesses are often begun with a friend or colleague using a limited company. At the early stages of a business relationship, focus tends to be on developing the business and shareholders often don't plan properly for the future.
Shareholders can by way of a shareholders' agreement benefit greatly from putting in place a mechanism for dealing with future changes of circumstance.
A shareholders' agreement, unlike the company's articles of association, is not a document that is required to be shown on the public record.
It is often much easier to invest in a private company with multiple shareholders than it is to realise that investment - and realising a capital gain from that investment is equally often a principal purpose in making the initial investment.
So what sort of issues can usefully be considered in a shareholders' agreement? Here are some key ones:
- To agree the areas of business that the company will undertake.
- In what circumstances can further shares be issued?
- Should the freedom to transfer shares be restricted?
- Should there be an obligation to offer shares to the existing shareholders before a third party?
- If so, should there be exceptions (for example transfers to other family members)?
- Are there to be circumstances where a shareholder is required to offer his shares for sale (for example on ceasing to be an employee or on death)?
- If so, what mechanism should be used to agree the value at which such shares transfer?
- In order to allow the whole of the company to be sold, should an agreed majority of shareholders be able to require the remaining shareholders to sell their shares to a third party?
- If the investment is in the form of a joint venture between shareholders, should there be any other mechanism which would allow the joint venture to be brought to an end (and thereby realise the investment)?
- Should a shareholder, or a class of shareholders, have a right to appoint a director to represent them?
- Should procedural issues (such as appointing company bankers/auditors, setting cheque signing authority limits and establishing how often board meetings are to be held) be addressed?
- Should there be any limits on the activities the company can undertake without going back to the shareholders for approval?
- If so, is the consent of all shareholders, or just a specified majority of shareholders, required? Examples of issues that for which shareholder consent could be required:
- Giving guarantees
- Capital expenditure
- Sale of company property
- Hiring, firing or increasing salaries over a certain specified level
- Changing the share structure of the company
- Changing the constitution of the company
- Winding the company up
- Whilst a shareholder, and possibly for a period thereafter, should shareholders be prevented from setting up in competition with the company?
These are just some issues that the shareholders' agreement can usefully address at the outset. Other issues will arise in particular circumstances.
Taking advice early and putting a shareholders' agreement in place can help both to provide the business with a stable platform for long-term success and to ensure that the expectations of the shareholders in making their investments are met.