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Shareholders’ Agreements : A Firm Basis For a Successful Relationship

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Rupert Wright, a corporate services lawyer at Charles Lucas & Marshall, explains the merits of shareholders’ agreements.

Rupert Wright - Corporate Services Specialist

Rupert Wright - Corporate Services Specialist

A shareholders’ agreement is a legally binding arrangement entered into between each of the shareholders in a company – setting out how their relationship as shareholders will be governed.

There are two very good reasons why shareholders should consider making such an agreement.

First, the process of negotiating may be a useful way of bringing out into the open many of the contentious issues which can become real problems in the future for a company.

Secondly, the agreement will provide a mechanism for resolving any disputes which might arise in the future.  The real difficulty is that the control of the day to day activities of the company rests in the hands of the board of directors and not the shareholders.  The minority protection legislation provides a poor remedy because of its cost and uncertainty.

A well drafted agreement should normally cover the following key areas to protect minority shareholders:

  1. Management.  The agreement will contain provisions setting out the rights of shareholders allowing minority shareholders to be involved in the management of the company.
  2. Dividend policy.  This is a very common area of dispute.  There will always be conflicting interests to retain money within the company for working capital and further investment or take it out for the profit of a shareholder.
  3. Dispute resolution. The shareholders’ agreement should contain a formal dispute resolution procedure, namely mediation or other methods designed to avoid complete deadlock.  This is usually cheaper than going to court and has the further advantage of being conducted in private.  As a last resort there should be a provision which enables any shareholder to wind up the deadlocked company and so realise some of its value.
  4. Funding.  The agreement should set out what the requirements are for further funding, and in particular whether or not existing shareholders can be required to provide further share capital or lend money to the company.
  5. Exit route. The agreement should specify what is to happen if one or more shareholders wish to sell their shares or if a third party offer is received to acquire the whole of the company.  In particular they should include pre-emption provisions allowing existing shareholders to acquire the shares of a shareholder who wants to leave at a fair price.  There should be drag along provisions which allow a sufficient majority of shareholders to force a minority shareholder to sell his shares in order to facilitate the sale of the entire company.

In summary, all companies with significant shareholders should consider a  shareholders’ agreement which will anticipate problems and help to resolve any disputes with a minimum of disruption and cost.

All existing shareholders’ agreements should also be regularly reviewed.

For further information contact Rupert Wright on 01635 521212 or rwright@clmlaw.co.uk

Written by Rupert Wright

December 2nd, 2010 at 12:33 pm

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