Shareholder agreements - the basics

By: Guest contributor

Date: 2 January 2014

Shareholder agreements - the basics{{}}They say the wise ones in business sort their divorce before getting married and, with the upsurge in shareholder disputes, you’ll find the wisest will have a shareholder agreement already in place.

The agreement regulates the relationship between shareholders - imposing duties and restrictions where appropriate with a breach and giving the aggrieved party the ability to claim for their losses.

1 Transfer and issue of shares

A shareholder agreement can restrict the onward movement of shares, protecting shareholders against unwanted parties being introduced. This may also include a restriction with regards voting against the transfer and/or issue of new shares. It can also include a right to transfer shares of an outgoing shareholder to the existing shareholders, before being offered to any third party.

2 Predetermined voting

A shareholder agreement will often feature mechanisms to regulate the way matters are put to vote. This can clarify how shareholders reach decisions.

3 Level of shareholder approval required for decision-making

The agreement should set out which matters require a higher level of shareholder support before being approved. This helps to protect minority shareholders from being ambushed during the voting process and is usually applied to decisions which have significant impact on the company.

4 Confidential information

Most shareholder agreements will include provision to keep information and documents relating to the company confidential.

5 Stalemate

On occasion shareholders can reach stalemate where a definitive decision cannot be reached by way of a ballot. To avoid getting embroiled in time consuming and expensive disputes, the agreement can set out processes to reach resolution including submission to an expert.

6 Events giving rise to share purchase options

A shareholder agreement can specify which events give rise to an option for shareholders to purchase the shares of another shareholder. Examples include bankruptcy or death of a shareholder.

7 Drag-along rights

A majority shareholder may wish to sell his/her shares to a third party but the third party may refuse to purchase unless he/she is able to acquire the entire shareholding. Drag-along rights allow a majority shareholder to force minority shareholders to join such a transaction. This prevents a majority shareholder being unable to sell his or her shares or having to sell shares at an undervalue.

8 Tag-along

Tag-along rights give minority shareholders the opportunity to be included in a share sale transaction where a majority shareholder is seeking to sell his or her shares to a third party. This is to avoid minority shareholders being left with an unknown or undesirable majority shareholder.

9 Restrictions on shareholders’ actions

Restrictions can be placed on the actions and activities of shareholders. For example, restrictions on shareholders investing in rival businesses, poaching employees and contacting customers.

These basic starting points highlight the complexity of shareholder contracts. As always, seek professional advice before signing any contract.

Guest blog provided by Saracens Solicitors who offer services to both commercial and private clients.

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