Shareholder Agreements Sellors our Legal Sector Experts

WHY DO YOU NEED ONE?

Shareholders Agreement

It’s the unfortunate fact of business life that disputes among shareholders are common. Think Steve Jobs at Apple. When people launch a start-up company, everyone is focused on getting the business up and trading, underlying quarrels between shareholders can be masked as you all knuckle down to keep the company growing.

However, when the honeymoon period is over and if business slows or a major decision is on the horizon, differences between the shareholders’ approach to the business can come to the fore, sometimes with damaging consequences. People often do not consider the implications of a business relationship going wrong.

Issues arise where one shareholder wants to leave to take up a new job, where a shareholder dies or where a shareholder wishes to take the company in a different direction. If a shareholders agreement is place at the outset, everyone has clarity on their position if a dispute arises or a shareholder wants to exit without enduring a costly and exhausting dispute relating to who can purchase shares and what they are worth.

Stephen Keogh, Commercial Partner of Sellors LLP Solicitors, explores why having a shareholders' agreement is a vital document in your business, what a shareholders' agreement should contain and the process for putting one in place.

What is a shareholders’ agreement?

A shareholders’ agreement is a private contract made between the shareholders of a company and often the company itself, which governs how the company is run, protects shareholder investments, and establishes the parameters of the relationship between the shareholders. The agreement can be entered into by individuals or corporate bodies.

Do you need a shareholder’s agreement?

The Constitution is an obligatory document under the Companies Act 2014 which is publicly available and sets out the rules under which a company is governed. The Shareholders Agreement is not compulsory, however it is a private document and for that reason it can contain more detailed information on the company and its members. Powers of Shareholders and Directors

It important to understand the difference between the powers of shareholders and directors when it comes to running a company. Being a shareholder doesn’t automatically give someone the right to make day-to-day decisions or to receive information, decisions are taken by the board of directors and access to information can be limited. Very often this isn’t an issue, since the shareholders and directors are the same people.

However, as most companies grow beyond the founders, challenges around decision making present themselves regularly. A shareholders’ agreement is, in effect, all about control and protection.

Why should you have a shareholder’s agreement?

1. Protection of investment

Shareholders agreements are designed to include terms to protect a shareholders financial investment in a company, regulating where money can be spent and under what conditions. It sets out what entitlement shareholders have to appoint directors to the board to ensure there is oversight on decision making and entitlement to information.

2. Business stability

A shareholders agreement details who is responsible for the day to day running of the company which gives stability to the bank, creditors and potential purchasers.

3. Intellectual Property

Very often individual shareholders of a company hold valuable rights which are used by the company (e.g. rights to source code or other IP, domain names, trademarks or property) in their personal name. This can have devastating consequences for a company if relations break down and a shareholdere claims ownership of such rights personally. It is important to provide in a shareholders’ agreement that all such rights belong to and are to be transferred to the company or are held for the benefit of the company.

Sellors

SOLI C IT OR S To find out more about creating a shareholders agreement and how our team can help, please contact:

skeogh@sellors.ie

061 432030

4. Minority Protection

The Companies Act 2014 provides for limited rights for minority shareholders, it is very common in a shareholders’ agreement to provide for certain restrictions on the powers of the directors to act without the consent of specified shareholders. Matters that would commonly be so restricted include the distribution of profits, a material change in business, paying excessive employee salaries, significant borrowing or large spending.

5. Shareholder Exit & Valuation

Provisions can be made for share valuations in the event that a shareholder wishes to exit the business, this clarity is important as it tends to be a disruptive time. It is also important to cover situations such as disability and death so that new members are not imposed on existing shareholders in those circumstances. Certain provisions can oblige a shareholder to sell their shares to the existing shareholders at a discount. Certainty in this respect reduces the potential for conflict. It can also provide for situations where a majority shareholder wants to sell out and can protect a minority shareholder so that they are offered the same sale terms.

6. Cash flow considerations

While it is important that the shareholders’ agreement protects the shareholder who wishes to exit by ensuring they receive a fair value for their shares, it is also important that it protects the remaining shareholders by ensuring that any payment to the exiting shareholder does not negatively impact on the cash flow of the business in a case where the company buys back the shares. It is recommended that a clause is included to allow for the buyback of the shares by the company to be funded over a period of time.

7. Keyman Insurance

The death or incapacity of certain members of the management team may have a detrimental effect on a company’s prospects. It is very common for companies to take out keyman insurance on its more important management team members the proceeds of which would be used by the company to hire replacement personnel.

8. Confidentiality and restrictive Covenants

A shareholders’ agreement will usually contain provisions requiring directors and shareholders keep confidential all matters relating to company business. In addition, it may contain provisions preventing shareholders starting competing businesses or dealing with customers of the company if they leave the company.

9. Resolving disputes

A shareholder’s agreement should outline the precise procedure that the shareholders must follow should a dispute occur. A well drafted shareholders’ agreement will include provisions that pre-empt disagreements and set out how these should be resolved. This will save a great deal of time, protect the operation of the business and reduce frustration and typically assist to lead to resolution between the shareholders. This is particularly important in family-owned businesses as the next generation becomes involved in the business.

10. Introducing new shareholders

A shareholders agreement should deal with the potential introduction of new shareholders and what happens to ownership percentages. If you are a new shareholder, the agreement should protect your investment in the Company.

How do you draft a shareholders’ agreement?

Shareholders can create a shareholders’ agreement at any time. The best way to prepare a shareholders’ agreement is to ask a solicitor experienced in commercial law to draft this for you, as they will ask specific questions designed to help you work through different options, depending on your circumstances. Usually, all that is needed is one or two meetings with a commercial lawyer to discuss what is needed. The shareholders agreement can then be drafted for consideration, with adjustments thereafter before they are ready to be signed.