We have recently seen a rise in the number of disputes arising between company shareholders where the parties have not entered into a shareholders’ agreement.
In particular, this is becoming a common issue in companies with two shareholders where each shareholder owns 50% of the issued share capital of the company and both shareholders are the only directors of the company. Such companies are known as “deadlock companies” because if the shareholders cannot resolve the matter in dispute, neither shareholder has a sufficient enough shareholding to wind up the company or to make and push through the decisions required to properly run and operate the company. This has the potential to create huge difficulties for the shareholders and can bring the company to a standstill, devaluing the shares the longer the dispute continues.
Such issues can be avoided if the parties enter into a shareholders’ agreement containing well drafted provisions setting out a process to be followed in the event that such a deadlock occurs. Having a shareholders’ agreement in place allows shareholders to decide precisely how matters should be resolved from the outset. This is by far easier and cheaper than the costs of engaging lawyers to unlock the stalemate or having to take the matter to court for resolution.
Of course, shareholders’ agreements are not only necessary for deadlock companies and resolving disputes is not their only function:
- Shareholders’ agreements can be used to provide protection for minority, majority and equal shareholders alike. For example, an agreement can include “drag along rights” which are rights for majority shareholders to accept an offer to buy their shares and to compel the remaining minority shareholders to accept such an offer. The converse of this is the inclusion of “tag along rights” which enable minority shareholders to compel majority shareholders who wish to sell their shares to procure an offer for the minority shares as well.
- A shareholders’ agreement can include “pre-emption rights” (i.e. rights of first refusal) for shareholders in the event that any other shareholder wishes to sell their shares. If the existing shareholders do not take up their right to purchase such shares, further provisions in the agreement can prevent a transfer taking place without shareholder approval. Such provisions prevent shares from falling into the wrong hands.
Shareholders’ agreements can also include pre-emption rights in relation to a deceased shareholder’s shareholding. Again, such rights enable existing shareholders to control movement of the shares and prevent shares from falling into the wrong hands. - Unfortunately, it is not uncommon for company shares to be a point in dispute between spouses during the divorce process. A shareholders’ agreement can ensure that shares are not transferred to an ex-spouse on divorce and further provision can be made for what happens when two shareholders of the same company are married and subsequently divorce. Without such provisions, a company is left wide open to a plethora of issues.
Needless to say, we would advise anyone setting up a private limited company or investing in a private limited company to enter into a shareholders’ agreement.
In an ideal world, a shareholders’ agreement will spend most of its life in a filing cabinet and rarely will it need to be consulted. However, they give great comfort and reassurance to shareholders because not only do they provide resolutions in the unfortunate event of a dispute, but they can also set out a clear and concise process for resolving those disputes and provide answers to questions that may otherwise lead to costly litigation.
At Clifton Ingram, all our shareholders’ agreements are bespoke documents drafted specifically to our client’s needs. If you are interested in having a shareholders’ agreement drawn up or would like to speak to a member of our Corporate Services department, please contact Barry Niven on 0118 912 0227.