When starting a new business, you may feel that all the stakeholders are aligned and there is no problem that cannot be solved around a kitchen table, especially if it is a business started by family members or close friends. Unfortunately, problems and disagreements can occur at any time and these problems could be very hard to resolve precisely because of the close connections and the fact that many things may never have been written down because you felt there was no need – or no time. People are unique and see things differently, and when disagreements arise about running a business, the divergence in views could turn out to be far greater than you ever expected.
If you are anything other than a sole founder who has given no equity to anyone else, you will have co-founder, investors and maybe key employees; but when you are very early in the game you might not have felt the need to set down the different rights and obligations of shareholders inside your privately-run company, and you may tend to de-prioritise having a robust shareholder agreement. You may even feel a shareholder agreement suggests a sentiment of doubt towards certain relatives or friends, potentially straining and disrupting the balance of interests currently working fine for the business. However, it is the exact opposite – no exceptions.
A shareholder agreement is set up to build up reasonable connections inside the business and create clarity among shareholders with respect to how the business works and what occurs in an undesired or unlikely situation. It gives a structure for all shareholders to stick to and thus can provide for a wide assortment of disagreements before they have the chance to occur and lead to extremely unpleasant or even unclear situations. Ideally, a shareholder agreement will help all parties develop the business amicably through a collective decision-making processes and when things don’t go as per plan, it gives a written answer or a position to the problem.
Generally, a shareholder agreement includes the following and it is common to any business structure.
Board of Directors
This is a strategic oversight role which may differ from the management team distinctively in large scale businesses, but might not be distinctive in small-scaled ones. In shareholders’ agreement it may include the following:
- Specific provisions relating to the composition and the appointment of the Board of Directors
- The number of members on the Board of Directors
- Existence and the appointment of non-executive Directors
- Shareholding interest of Directors
- Powers and authorities explicitly assigned to the Board or specific roles
- Special committees of the Board or special reporting lines, e.g. for audit matters
Voting rights
There are some prerequisites in the Companies Act of 2007 which provide that some decisions require a majority vote (51%) whereas some require a 75% majority vote. However, several decisions that could impact a company (eg: financing, key objectives) fall outside the remit of the Companies Act. So they are left to the Board of Directors unless there are provisions to the contrary.
Additionally, a shareholders’ agreement can only be amended by unanimous agreement of all shareholders, whereas a change to the Articles of Association requires only a 75% majority and therefore a shareholders’ agreement affords additional protection to minority shareholders.
Cash flow consideration
It is essential to protect the company and all its shareholders by making sure that any payment that is made to any one existing does not affect the cash flow of a company. However, the shareholder agreement also states that it is a company’s responsibility to ensure that a shareholder who decides to exit may receive a fair value for his or her shares.
Transfer of shares
There are provisions that are imposed to govern the transferability of shares. For example,
- Control: Some transactions certainly require the consent of a specified shareholder.
- Preventing outsiders from owning shares: The shares should be first offered to the existing shareholders before introducing it to a non-existing shareholder.
- Providing for situations on death or divorce: Transferring the shares to the spouse or a family member other than the spouse.
Valuation of shares
If a shareholder wishes to exit, certain provisions are taken to arrive at appropriate valuations of shares.
Dispute resolution
A shareholders’ agreement provides an effective mechanism to resolve disputes among shareholders. It also assures that the disputes are kept confidential. Several companies have added an arbitration clause which makes all the shareholders work with and abide by the decision of an independent arbitrator.
Dividend policy
The company may have a dividend policy for shareholders in order to maintain harmony among them.
These factors may or may not be present in your shareholder agreement. It is important to realize that every shareholder’s agreement will be customized to suit the particular conditions of the business and its shareholders. It is up to the shareholders to proactively and collaboratively ensure the agreement is acceptable to all, well before any otherwise unpleasant situations may arise.
