Why a Shareholders’ Agreement?

Having recently acted on a matter where I was asked to draft a shareholders’ agreement, it reminded me of the importance of having a shareholders’ agreement to fall back on.


Why a Shareholders’ Agreement?It’s often not taken into consideration as it may be the start of a newly formed company purchasing property for example where everything is agreed in principle and progressed on trust or the shareholders defer it to a future date. Some people believe that it may be a waste of time and that time is better spent on running the business itself.

It’s the typical …… “I wish I had an agreement in place…” situation when the shareholders fall out and have given no thought to fundamental issues such as pre-empting a moment in time where one may want to leave the business or not want to proceed with the same course of action that the other may want to, such as taking on a new lease to expand the business. Another example maybe where one shareholder of a property development company may want to sell, rent, purchase a property and the other doesn’t.

Of course, a shareholders’ agreement needs to be tailored to the company and here are some issues that any shareholder of a company needs to consider:

  • The financing of the company
  • Matters requiring consent of all shareholders
  • The management of the company
  • The dividend policy
  • The procedure to be followed on transfer of shares
  • Deadlock situations
  • Valuation of shares
  • Dispute resolution mechanisms
  • Cross options (where shareholders take out life cover which is held on trust for the other shareholders’ and enter into a cross option agreement enabling/requiring a deceased shareholder’s estate to sell the deceased’s shares with the purchase price coming from the proceeds of the life policy- providing a mechanism for the other shareholder to acquire the deceased’s shares).

The absence of a shareholders’ agreement opens the potential for disputes and disagreements between the shareholders.

Remedies for breach

A breach of the shareholders’ agreement is a breach of contract and gives rise to contractual remedies: damages etc (although damages may be difficult to quantify).

- Imran Choudhary, June 2018

Further Reading

Deadlocked Companies - Judges Have the Power to End Paralysis

Company Formation

Company Restructuring

A reminder of the importance of due diligence!

 

 
If you are thinking of setting up a new business or would like any advice in relation to your existing business, you can contact Martin Reynolds or Imran Choudhary in our Property and Commercial Department in Reading. Use the form on our website to arrange a fixed-fee consultation at our offices in Queens Road, Reading, Berkshire, or call us on 0118 958 9711 or [email protected] [email protected]

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