Having recently advised a company experiencing unexpected and unwelcome issues where there were deadlocked shareholders we saw first-hand how a Shareholder Agreement would have saved much stress and expense.
WHY A SHAREHOLDER AGREEMENT
It exists to protect the interests of the company and the shareholders. It ensures transparency, regulates how decisions are made, and offers a mechanism for resolving disagreements.
ARTICLES OR SHAREHOLDER AGREEMENT
They can do a similar job but are also different. Often they compliment each other.
Articles are statutory in nature and not contractual. They are a public record visible to all.
Unlike a Shareholder Agreement, shares are bound by what the articles say in whoever’s hands they fall.
A Shareholder Agreement is a contract and the parties to it are governed by it.
As it is a contract it benefits from the contractual rights that articles do not. Those include specific performance and damages.
It is private and many organisations do not want the public exposure that articles bring.
SHAREHOLDER AGREEMENT BENEFITS
Loosely, those include:
what type of shares will be issued and to who;
majority and minority shareholder rights;
the rules for the sale and purchase of share;
policies for running the company;
minority shareholder voting rights and protection;
dilution rights;
dividends;
confidentiality;
dispute resolution, including where there is deadlock;
SHAREHOLDER AGREEMENT RISKS
No one enters into business as a director or investor expecting disagreements but they do happen to the best intentioned.
Perhaps over the direction of the business or a particular transaction. Maybe regarding dividends, or appointment of accountants or bankers. It could be over the the sale of shares or voting rights the list is frankly as long as your imagination.
SOME UNINTENDED CONSEQUENCES
without a Shareholder Agreement shareholders who are dismissed employees keep their shares.
minority shareholders are limited to the bare statutory protections;
shares can be transferred to anyone even competitors who can see your business secrets;
shareholders can use or leak confidential information;
there is no exit strategy for shareholders who want to leave;
deadlock situations can result in the company having to be wound up and a good business disappear.
THE MEDICINE
Having a robust Shareholder Agreement in place can support the company to run as normal whilst disputes or shareholder changes are resolved.
It is only natural to want to limit legal expense.
Just the same disputes can lead to far greater unnecessary future costs, unwelcome stress, damage to business and even business reputation.
Investing in a Shareholder Agreement tailored to your specific needs is worthwhile, whatever the stage of your business progression.
ALEXANDER BUSINESS LAW SOLUTIONS are lawyers for business and draw up Shareholder Agreements and advise shareholders and directors.
Alexander Business Law Solutions is a member of Laurel Leaf Networking.