Regardless of whether the contractual relationship being entered into be a partnership, a limited liability partnership (LLP) or a limited company, there are a number of areas that the agreement should cover, and these should be discussed and agreed at the outset. A properly drafted agreement will not only ensure that all concerned parties are aware of their rights and the procedures in place, it also reduces the risk of lengthy and costly litigation in the event of a dispute. This is particularly prevalent with regard to shareholder issues, as it is often the case that issues begin to develop as businesses become more successful as there is more money involved and this may led to a change of perspective. However, shareholder issues can arise at any time, and well drafted articles of association and shareholder agreements can help reduce the number of disputes occurring in the first place.
A shareholders agreement should be used alongside the articles of association, which is a publically viewable document containing the rules concerning how the company is run. The shareholders agreement will provide regulation of the shareholder relationship in regard to the affairs of the company. There are a number of areas that need to be covered by the shareholder agreement, and it is important that these areas are comprehensively addressed. The agreement must consider the shareholder proportions, whether or not there will be different types of shares which carry different rights, when and how new shares are issued, share transfer provisions and any other prohibitions on the shareholders. Further, the shareholder agreement should deal with any director requirements; such as how new directors are appointed and whether or not there is an imposition for the number of directors.
For more on benefits of shareholders agreements and what they ought to include, this is useful.
The agreement should also consider when directors and shareholders meetings should be held and the relevant voting procedures, i.e. the number of shareholders at a meeting and what happens in the event that there are an equal number of votes at a shareholders meeting. The shareholders agreement should also include clear shareholder policies, such as policies relating to loans and dividend procedures. Clear consideration should also be given to various situations in which consent is required, and whether or not only one or the majority of shareholders is required. Examples of situations in which the issue of consent needs to be explored includes when new shares are issued, when changes to share capital are made, company expansion or reduction (via acquisition, disposal or otherwise), any transactions of an usual nature and a number of other situations. There are a number of other areas that should be covered by the shareholder agreement, including clear non-competition and confidentiality provisions as well as clear terms dealing with the process in the event of a shareholder leaving.
Valuation and Payment
Valuation and share payment concerns should also be clearly addressed as these are often the subject of shareholder issues and disputes. For example, it is important to consider any accounting principles that are to be applied for valuations, as well as what happens when a shareholder decides to sell their shares. For example, there may be provisions that the payment is made as a one-off payment or in instalments. There are, of course, a large number of other areas that need to be considered and these will be dependent on the specifics of the relationship.
It is important to seek expert legal advice with regard to contractual provisions within a shareholder agreement. Examples of common shareholder disputes include a disagreement in relation to a potential new business transaction or a difference of opinion with regard to what a shareholder is entitled to at the point in time at which they wish to sell their shares. Another common area that may result in further legal action being required is when a shareholder wishes to transact with a competitor. These disputes can lead to great losses (both financially and otherwise) if they are not dealt with efficiently as soon as they arise, and this is even easier when the agreement is correctly drafted as it leaves less room for ambiguity or a misunderstanding of the terms and conditions, which should clearly reflect the intentions of the parties and cover the potential problem areas mentioned.