Business Law & Compliance

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Top 5 tips on drafting shareholders’ agreements

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You’re about to launch a new business and finally meet a prospective funder keen to invest. They then ask to see your proposed shareholders’ agreement. 

Quite often the response will be “why do we need this?” or “haven’t we spent enough time/money with professional advisers already?”

It is easy to overlook the importance of entering into a shareholders’ agreement, however they should provide, among other things, an excellent dispute resolution mechanism if the parties involved fall out further down the line.

Here, we look at why shareholders’ agreements should be considered a necessity rather than a luxury. Here are our five top tips:

1. Ensure you protect your concerns in the business relationship

A shareholders’ agreement regulates the relationship between the company and its shareholders. Yet it should also govern the interaction between: the majority and minority shareholder; and the board and other shareholders.

A shareholders’ agreement can flesh out key issues relating to share transfers, further share allotments and the parties’ obligations. This codifies your business relationship and should prevent the exploitation and manipulation of personal friendships if the business unfortunately starts to deteriorate.

2. Consider a combined shareholder and subscription agreement

A combined agreement will deal with:

  • subscription provisions (dealing with how the investor is investing); and
  • shareholder provisions (regulating the running of the company going forward).

Using such a combined agreement can help to save time and additional expense by dealing with both sets of issues simultaneously.

3. Keep it private

Many companies do not have a shareholders’ agreement and include operational details in their articles of association. However the articles of association need to be filed at Companies House and accordingly their contents are publically available.

However certain information should definitely be kept out of the public domain, such as:

  • dividends policy; 
  • exit strategy; and
  • how to keep managers incentivised.

One of the main benefits of a shareholders’ agreement is that it does not need to be filed at Companies House, and this potentially sensitive information can be kept private.

4. Ask, and address, those difficult questions

The company may be launched in a blaze of optimism but what if:

  • the bank stops lending? 
  • the parties fall out? 
  • one of the employee shareholders falls ill and has to leave the company?

The above questions, and many more, should be posed to the participants. The negotiation of the shareholders’ agreement provides an excellent opportunity to make sure everybody is on the same page before going into business together.

5. Prepare for exit

It may seem strange, when the company has just been launched, to include an exit clause. However by including plans for the future, it forces shareholders to discuss their visions (hopefully mutual) for the future. Any disagreements you may have can also be resolved, thereby limiting the scope for conflict further down the line.

By utilising a shareholders’ agreement, the final negotiated agreement provides clarity as to the future direction of the company. 

However, just as importantly, the negotiations leading up to signature will force the shareholders to sit down and address the difficult issues together. Hopefully this will ensure they have the same aspirations/plans before taking the big step of going into business together.

Paul Taylor is a partner and Elliot Cowan is an associate at business law firm Fox Williams LLP.

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