Shareholders Agreements

Shareholders Agreements – Business owners often spend a great of time getting their business venture off the ground, then when success arrives , they bring in advisers to grow the business further. With increasing success and profits they need to spend additional time to seek tax advice.

Often, however, they fail to spend additional time on protecting the growing asset value of their business for their family.

When there are two or more directors involved they often find it difficult to discuss the nitty gritty of what happens to the business and their respective families should either of them be incapable of working at some point in the future.

It is very helpful all parties to set aside the time ( preferably early on in their relationship) to discuss and implement a shareholders’ agreement, as it will help to avoid the disruption and additional costs involved in resolving disputes.

Although a shareholders’ agreement is not a document in the public domain, it must be disclosed in share valuation negotiations for tax purposes, so is not completely secret.

A shareholders’ agreement only governs its signatories, whereas a company’s articles of association automatically govern its shareholders.

There are no rules about where these terms should be set out. If it helps to make the information public, it may be best for the terms to be in the articles so that third parties are legally ‘on notice’. If the information is private, a separate shareholders agreement can be prepared.

Here are ten typical issues the shareholders will want to regulate that might be included in your shareholders’ agreement.

  1. Rights to appoint and remove directors.
  2. Terms to protect minority shareholders so that, for example, unanimous shareholder approval is required for certain company decisions.
  3. Restrictions on freedom to dispose of shares and, if other shareholders have pre-emption rights, at what valuation such transactions should take place. A minority stake in a company is usually powerless, so the value of the minority shares is correspondingly reduced. This can be over-ridden in favour of treating all shares as being of equal value, rather as if the company was publicly quoted.
  4. Restrictions on changing the nature of the business.
  5. Terms regulating the raising of capital to avoid diluting existing shareholdings.
  6. Dividend policy and entitlement. Note that a stated dividend policy may affect the value of the company’s shares for tax purposes.
  7. Waiver of dividends. Certain shareholders may agree to waive dividends for an agreed period or permanently. Again this may have tax implications because it may entail a value shift from one shareholder to another.
  8. Limitations on directors’ freedom of action, for example to invest in a new capital project or charge the company’s assets.
  9. Business plan. Setting out the business plan in a shareholders’ agreement may help to ensure that all shareholders have the same vision.
  10. How shareholder disputes should be resolved.

Typically we find that Directors of companies that do not have shareholders agreements also have not bothered to have their wills updated. We regard these two key documents as vital for all business owners and key to preventing disputes, financial hardship and possibly emotional distress for families.

About Ray L Best

Ray Best has had over 30 years experience of advising on complex financial matters. A published author of a number of books including “Partnership and Shareholder Protection”, Inheritance Tax Simplified”. We provide an initial meeting at no cost and only engage with clients when we can add significant value.
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