The Shareholders’ Agreement is a contract that describes the shareholders’ rights and responsibilities and establishes their ownership rights in the company. It usually contains provisions governing the transferability of shares, distribution of dividends, pre-emptive rights, meetings and resolutions, and profit sharing.
Several key elements should be taken into account and discussed before signing your new shareholders’ agreement:
The procedure of raising funds from investors and the kind of voting rights;
Shareholders: Who owns what shares? Are there restrictions on selling those shares?
Intellectual property: Who has rights to intellectual property generated by the company?
What are the responsibilities of the shareholders? What happens if a shareholder dies, goes bankrupt, or becomes disabled? What happens if the shareholders stop working together well?
The pre-emption right, the right of first refusal, and the right to participate in dividends and a share of profits;
The right to vote on decisions;
Hiring directors having more than two years of service agreements;
The right to transfer shares to another party, including family members;
The right to buy any shares that another shareholder is selling; and
The right to sell the shareholder’s shares back to the corporation at fair market value if the shareholder decides to discontinue his membership.
Set out a dividend policy
It is essential to identify that the company will pay dividends to the shareholders pro rata in the same proportions as their respective shareholdings at such times and in such amounts as the Board of Directors may determine under section 830 of the Companies Act 2006.
Deal with the transferability of shares
The common rule is that the company will have the right to refuse any transfer of shares in its sole discretion, but it will not unreasonably withhold its consent to any transfer.
Deadlock anticipation
A deadlock is a situation that arises when the directors or shareholders are unable to come to conclude a certain decision preventing them from being able to conduct business effectively.
Deadlocks can occur in various scenarios, such as when shareholders are divided into factions with opposing views on a critical matter or when there is an equal number of directors with opposing opinions, leading to a tie vote.
General provisions can be implemented to prevent or address deadlock situations:
Articles of Association: The company can include provisions in its Articles of Association that address deadlock situations, such as specifying a casting vote for the chairperson or requiring a supermajority for specific decisions.
Shareholders Agreement: Deadlock resolution mechanisms can be added to the shareholders’ agreement, such as alternative dispute resolution procedures or the appointment of an independent third-party mediator or arbitrator
Board Composition: Companies can consider having an odd number of directors on their board to minimise the risk of a tie vote. They can also appoint independent non-executive directors who can provide an unbiased perspective on contentious issues.
Ultimately, the best approach for preventing and resolving deadlocks will depend on the specific circumstances of the company and its members.
Special Voting Right
In the event the company has multiple classes of shares, different voting rights and dividend entitlements for each class should be discussed.
Overall, understanding the key provisions and having a deep discussion about them is essential to conclude a successful Shareholders’ Agreement. This type of agreement is highly important, and putting your attention can save you and your partners from huge potential headaches down the road. If you are looking to draft your Shareholders’ Agreement and put it into use at minimum costs, please contact us to tell us how we can help you!