November 22, 2021
A shareholders’ agreement sets out the rights and obligations of shareholders and is a binding legal contract between the shareholders and the company. A well-drafted shareholders’ agreement can give members a say in the running of the company and prevent misunderstandings and disagreements from arising in the future.
By asking an expert corporate solicitor to draw up a shareholders’ agreement, you can be sure that it will be tailored to the unique requirements of your company. Your solicitor will be able to ensure the following details are in place:
1. Transfer of shares
It is important for a company to control who holds its shares. By putting the right clauses in the shareholders’ agreement, your solicitor can ensure that your company’s shares can be protected from being sold to a third party without first being offered to existing shareholders.
The agreement can also require directors to sell their shares to other directors or shareholders, should they step down as director.
2. Share restrictions
The shareholders’ agreement can put restrictions in place on the issuing of new shares and prevent the directors from changing the rights which attach to existing shares. This can stop them from reducing the rights that shareholders have.
3. The right to veto
The agreement will generally include the right of shareholders to veto certain actions, for example, requiring a vote of 75% in favour before undertaking a major investment or adding or removing a director. These rights should be suited to the specific needs of your business and your solicitor will be able to go through what it would be appropriate and prudent to include to offer the best protection.
It is important to strike the right balance between holding directors accountable for their actions and not hindering the ability of the company to take on new challenges. At Tayntons, our corporate solicitors have a strong commercial understanding and can work with you to ensure you have the right provisions in your agreement.
4. Non-compete clauses
Non-compete clauses will restrict what a shareholder can do, to include in the future after shares have been sold. This is to prevent a shareholder from leaving and setting up a rival organisation or working for a competitor.
A shareholder is likely to have detailed knowledge of the company’s business, including business plans, client and supplier lists and trade secrets. Your solicitor will be able to go through the risks to your organisation and ensure that strong non-compete clauses are included to ensure that your business is protected as far as possible.
5. Drag-along and tag-along provisions
The shareholders’ agreement can include so-called drag-along and tag-along clauses to keep shares together in the event of the sale of the company.
If a sale is agreed upon, then a minority shareholder can insist on being included in the deal, a tag-along provision.
Similarly, a drag-along provision can require a minority shareholder to sell their shares along with the majority shareholders. This can make the sale of the business far more appealing to a buyer, who might not want to buy unless they can purchase all of the shares.
A strong shareholders’ agreement can give the relationship between a company and its owners a strong legal foundation. By clearly setting out what is expected of all the interested parties, disputes can often be avoided.
Jaron Crooknorth, Solicitor/Partner at Tayntons and Head of the Corporate and Commercial Department can advise you on what to put in a shareholders’ agreement for your business and draft the document accordingly.