Shareholders' agreements — sharing company ownership
Dealing with sale proceeds of a business
A look at the personal estate planning issues which arise following a sale and the tax implications of selling your business.
Learn how to deal with business sale proceedsWhat is a family charter?
In a family business, which includes multi-generations and sides of the family, an alternative to a shareholders' agreement is a family charter.
A family charter is a slightly less legalistic document that sets out the rules of operation of the family business, goals and long-term strategies, and how the various family members should behave towards each other in relation to the business.
We've written an article on family shareholders in which we look at family charters in more detail.
Decision making
The day to day running of a company is generally left to the board of directors. Under a shareholders' agreement, the parties can provide that certain matters require shareholder approval in any number of possible variants (so by a majority, a specified percentage or unanimity). These matters are often referred to as reserved matters.
Care should be taken to ensure that a standard, and often lengthy, list of reserved matters is not simply included by default, as the provisions may not be relevant or provide the required protection. We would recommend that a controlling shareholder should think carefully about what restrictions on his or her decision-making are acceptable, if any. Obtaining consent from shareholders can impact on the ability to make decisions quickly, so care needs to be taken to balance a willingness to provide protection to shareholders with the ability to operate the business effectively.
Dispute resolution
At board level, decisions are made by majority. At shareholder level, voting is linked to the number of shares held. Where a shareholders' agreement includes reserved matters, then as a matter of contract the decision making on these issues will be dictated by what the shareholders' agreement says.
What should be the solution when deadlock arises?
If there are two equal shareholders they may be happy that, in the event that they cannot agree on a course of action, they will not proceed — leave the deadlock in place.
Alternatively, the chairperson could have a second or casting vote in the case of an equality of votes, and this might be acceptable where there are multiple shareholders as opposed to two 50/50 shareholders. If this is proposed, care should be taken as to the terms of appointment of the chairperson so that this element of control does not pass to another shareholder.
The matter in dispute could be referred to the company's accountants or a nominated third party such as an independent firm of accountants to resolve the matter in dispute, or be referred for adjudication or mediation. But are the shareholders willing to agree that a third party make the decision for them, or might they prefer to leave the matter deadlocked and let commercial pragmatism drive an eventual resolution?
In an extreme case, the answer may be to resolve the impasse by share purchase to buy out one of the parties.
Dividends
Consideration should also be given to whether or not there should be a formal dividend policy or, if not, should the matter simply be left for the board to determine from time to time. It may also be helpful to consider, when minority shareholders are being brought into equity, whether they should have any dividend rights or just receive shares for their capital value, (in which event they should be issued shares with class rights giving them no rights to dividends).
For further guidance on shareholders' agreements, contact our company law solicitors.