Managing the relationship between shareholders and your business

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Getting a new business up and running can be a difficult and at times convoluted process. As the journey can involve many processes, expanding the business by obtaining funding and dividing equity amongst shareholders can be both exciting and daunting. When there is more than one shareholder in a business, a Shareholders Agreement is a critical and necessary document for you to have in place. 

 

What is a Shareholders Agreement (SHA)?

A Shareholders Agreement (SHA) represents the mutual understanding of the shareholders of your company. It formalises their position in accordance in the company and confers particular obligations, rights and responsibilities on shareholders including rights about sale and transfer of shares and outlines the dispute resolution process. 

 

What does an SHA cover?

Whilst traditionally a complex and comprehensive document, SHAs must cover all aspects of the relationship between shareholders, the company and set the boundaries and parameters for directors. This includes (but is not limited to):

  • The allocated proportions of shares for each shareholder (at the date of signing);
  • Options for employee share schemes (if applicable);
  • Procedures for any dispute resolution;
  • The details and procedures for shareholders meetings; and
  • The process when a shareholder wants to sell or transfer their shares in the company. 

> Proportion of shares

At the sate of signing the SHA, it must outline the share structure of the company. This not only includes any individuals who have shares, but also trusts and other companies with shareholdings, and their relevant allocations and share types. 

Whilst there are a number of categories of shares, the two most common are ordinary and preference shares. The difference between ordinary and reference shares is that, when dividends are declared on shares for the financial year, people who have preference shares have first rights to their dividends, and these are capped for preference shares. Preference shareholders also have the right to have their capital repaid in the event the business fails. However, shareholders with ordinary shares are paid out second - both in dividends and in the event the company fails. Ordinary shareholders carry voting rights as outlined within the Shareholders Agreement. 

> Employee share schemes (ESS)

From time to time, and if the company has the capacity, they may issue a notice for the sale of shares only to their employees. This is known as an Employee Share Scheme (ESS) or Employee Share Option Plan (ESOP). Where a company engages in an ESS/ESOP, they must stipulate clearly in the SHA the procedure for inviting new employee shareholders, the sale of the shares, as well as a mandatory buy-back procedure for if they ever leave the company/are terminated. The latter will include any details of remuneration for those shares the employee held at the time of resignation or termination. 

> Defaulting shareholders

If shareholders don't uphold their obligations as specified under the SHA, they are considered to be in default and action can therefore be taken by the company. Often where a shareholder becomes a defaulting shareholder, the common procedure is to allow other non-defaulting shareholders the option to acquire those shares. As shareholders can fall into default in a number of ways - convicted of a crime, failure to five notice of change of control of a shareholder who is a trust, or they don't live up to their obligations under the SHA - it is important to have a procedure in place to deal with these scenarios. 

> Shareholders meetings procedures

As shareholders are often separated from the day-to-day management of the company, there are specific requirements that need to be satisfied at shareholders meetings to ensure a decision is passed. Each shareholder with voting rights associated with those shares is often given one vote per share that they hold, and often decisions will need to be passed by a majority. The procedure for calling and holding a shareholders meeting is outlined in the SHA, including the relevant quorum which must be present. A quorum is a specified number of shareholders which need to be present - or otherwise, a specified proportion of shareholdings which need to be present - in order for a decision to be passed. This is also often by a majority or in some circumstances, 75% or greater. 

> Selling or transferring your shareholding in a company

In the instance that an existing shareholder wishes to transfer, assign or sell their shares to either another existing shareholder or new shareholder companies need to have a process in place to allow shareholders to dispose of their shares. Traditionally all shares being offered for sale must first be offered to existing shareholders before being offered to non-existing shareholders.

If you would like to learn more about the documents mentioned above, and what Cubed by Law Squared can do to help get your business off on the right foot, please leave your details using the link below, or email cubed@lawsquared.co for more information.