A shareholders’ agreement is used to regulate the relationship between shareholders of a company. It is common practice for a shareholders’ agreement to interact and work in tandem with the Articles of Association of the Company as well. A shareholders agreement is likely to be used to manage the way that shareholders act and govern the processes that are to be followed when certain events occur for example this may involve the sale of shares, the payment of dividends or the exit strategy for shareholders.
Care home operators which are structured as limited companies and have multiple shareholders will no doubt benefit from having a shareholders’ agreement in place.
What happens if we don’t have a shareholders’ agreement?
Unfortunately we are often approached by individuals who have begun a limited company together and subsequently a disagreement arises and the parties have fallen out. No matter how strong the relationship was at the start of the business venture when money and business are added to the relationship things can go awry. Difficult decisions that may need to be made can be divisive and cause relationships to become strained which may ultimately affect the company’s ability to trade.
If a shareholders agreement is in place?
It can provide a mechanism for resolving disputes. A clear advantage of this is that it gives the shareholders clarity as to how to resolve the dispute and also any resolution process is likely to have been agreed between the shareholders as a fair and amicable way to resolve a dispute at the outset. A dispute resolution process can take many different forms and be tailored to the specific requirements of each individual company and group of shareholders.
A further key aspect that is often included within a shareholders agreement is how any share transfers should be managed. It will no doubt be important for any remaining shareholders to ensure that they have, at least, a right of first refusal (pre-emption) to buy the shares from any selling shareholder.
In this situation it is often also wise to include a mechanism through which the shares of the company are valued if no common ground can be found between the shareholders. A right of first refusal ensures that the existing shareholders have the right to retain control of the company and may even stretch as far as to a right of veto over who a shareholder may propose to sell their shares to.
A similar provision to the rights of pre-emption detailed above are drag along and tag along rights. When dealing with a private limited company it is often the case that any purchaser would want to buy the entire issued share capital of a company and allow an individual to retain a small shareholding. Of course if there is an individual or individuals who hold a small proportion of the shares a majority shareholder wishing to sell would not want to be held to ransom by the minority shareholders.
A drag along right, therefore ensures that a majority shareholder can force the minority shareholders to sell their shares for a price per share at least equal to that being received by the majority shareholder. The equitable trade off is that the majority shareholder grants the minority shareholders a tag along right, to force the buyer to purchase their shares as well, in the event that a drag along right is not used.
An alternative example of when shares may need to be transferred is if shares are issued as part of an employment incentive package. These are generally specialist matters which involve careful tax planning, but when putting such an incentive in place matters relating to what happens if the employee leaves need to be considered.
Are they able to retain their shares, if they are forced to sell then how much should they receive, does the manner in which they cease to be an employee make a difference to what happens to the shares?
How to give assurance to shareholders?
Moving away from share transfers, a shareholders’ agreement can be used to give comfort and assurance to shareholders. For example you may use the shareholders’ agreement to include certain restrictive covenants preventing shareholders from competing with the company, ensuring that certain matters are kept confidential or to confirm that each shareholder will promote and work in the best interests of the company.
Finally, shareholders may wish to include provisions relating to the conduct of the company. These may prevent the company from employing people above a certain salary, from taking on debt or entering into litigation (as an example) without the approval of a certain proportion of the shareholders.
One thing to be mindful of, considering all of the above, is to not place too many rules, restrictions and controls in place such that it stifles the company and prevents it from being a success. It is important to consider what is important and necessary rather than being overbearing and irregular.
Preparing a shareholders’ agreement
Preparing a shareholders’ agreement can be a complicated task. Great care needs to be taken to ensure that the agreement is compatible with, amongst other things, the relevant company’s articles of association and where the agreement refers to what happens to the shareholders’ shares when they die, the shareholders’ wills. The best advice therefore is to plan carefully and get legal representation at an early stage.
Why choose Birkett Long?
At Birkett Long, our Health & Social care solicitors have significant experience in advising healthcare professionals, including:
- producing and amending shareholders’ agreements
- assisting with the incorporation of companies
- advising upon share purchase and sale arrangements
- Drafting shareholders’ agreements
- Reviewing and amending shareholders’ agreements
- Advice on the interaction between shareholders’ agreements and articles of association
- Advice for shareholders on issuing new shares
- Advice on shareholder exits
- Advice for shareholders on corporate governance
- Shareholder disputes
To discuss how our corporate lawyers can help with shareholders’ agreements and shareholder relations, please call Tim Field, our health and social care solicitor, on 01206 217366.
