shareholders' Agreement

Common issues dealt with by a shareholders’ agreement

The following provisions are generally provided for within the Shareholders' Agreement but these can be changed to suit specific requirements:

Finance

1. No shareholder will be obliged to subscribe for further shares
2. No shareholders are obliged to commit to further funding unless by unanimous agreement.
3. Any further agreed funding advanced to the Company by shareholders shall attract interest either at the at a bank base lending rate or at a rate agreed by all parties.
4. If any finance is to be raised by the issue of debentures, then debentures shall be offered to the Shareholders pro rata to their existing holdings.

Issue and Transfer of Shares

1. Any additional shares to be issued at an agreed price by the Company shall be issued either in such proportions as may be agreed upon by all members or in default of this in their common share ratios thereby keeping shares held in same percentages.
2. Notwithstanding the default common share ration position, should any member (or members) not wish to take up the offer within an agreed timeframe then they can be offered to shareholders who do wish to take up offer which will alter the ratios.
3. Shares cannot be freely transferred to persons or organisations outside of the company unless unanimously agreed or unless provisions relating to Tag Along / Drag Along clauses (if provided) are relied upon.
4. In the absence of unanimous agreement under ‘4’ above) and current shareholder wishing to sell shares must offer them to the remaining shareholders on a pro rata basis at an agreed price per share.
5. If a price cannot be determined / agreed then the price per share shall be determined by a third party who can certify a fair values for shares as between willing buyer and seller.
6. Any shares not taken up by the shareholders after an agreed time period (30 days reasonable standard) may be sold by the Seller in the manner. Any transferee under this provision must complete a deed of adherence to the shareholders agreement and therefore effectively become a party to the original agreement and agree to abide by its terms.

Obligatory Transfer Provisions

1. In the event of any of the circumstances referred to below occurring in relation to a Shareholder, that Shareholder shall be deemed to have given (and the other Shareholders shall be deemed to have received) a Seller’s Notice:

(a) If, being an individual, the Shareholder dies: or

(b) if any Shareholder commits any material breach of any of his obligations under this Agreement and fails to remedy such a breach (if capable of remedy) within 30 days after being given notice by the other Shareholder(s) so to do.

Buy Back Provisions by the Company

1. As an alternative (or in addition to) the sale/transfer provisions the Company has power under the Companies Act 2006 to buy back shares. This was not permissible under the Companies Acts 1985/1989 and Articles of Association required specific amendment to enable the company to do so. Technically a buyback agreement or contract is required which has to be approved by all of the shareholders and the contract can either be for the company to purchase the shares or to become entitled or obliged to purchase the shares at a later date. I believe that it is important for the group structure that. Notwithstanding the above there is no reason that the buy-back provisions cannot be referenced within the shareholders agreement for clarity.

Note: In addition to the requirement that there be a buyback agreement the other requirements are:

(a) that shares the subject of the buyback are paid up (there is no maximum number of shares the Company can buy back;

(b) funding for the buyback can either be from distributable profits or a from the proceeds of a fresh issue of shares made for the purpose of financing the buyback or from capital;

(c) the shareholders must pass a special resolution to approve the buyback and authorise the company to enter into a buyback agreement (further resolution are required if buyback from capital – this will probably not be an issue);

Where Employees in Company also hold Shares

1. If any Shareholder (also being an employee) becomes an Outgoing Employee where that Outgoing Employee is deemed to be a Bad Leaver, then that Shareholder shall be obliged to sell to the other Shareholder(s) or the Company all (but not some only) of the Shares in the Company held by him.
2. One would need to determine what qualifies an employee as a bad leaver. Good leavers by comparison have to abide by transfer provisions within the agreement so there is still a safeguard in place to prevent shares from going to someone outside of the Company.

Option to Purchase on Death

1. With a view as always to keeping shares within the Company it is possible to include provisions whereby in the event that a Shareholder becomes deceased, the other Shareholders will have the right to purchase, on a pro-rata basis, the shares of the deceased from the estate of said shareholder.

Deadlock Provisions

If ever there is ever a situation arise where the company cannot go forward because of an impasse (where for example there are only two shareholders and they disagree on how to proceed) a ‘Deadlock Provision’ can be provided for within the Agreement.

The clause is inserted here in its entirety for information:

1. There is a deadlock if a resolution is proposed and one of the following applies:

1.1 at a properly convened meeting of Shareholders or of the Board there is no quorum at the meeting and no quorum at the meeting when it is reconvened following an adjournment;

1.2 the Shareholders are unable to come to an agreement on any issue which prevents the Company from properly carrying on the Business and such dispute is not resolved within 30 days of its arising at a General Meeting of the Company.

2. There is no deadlock if a meeting, or adjourned meeting, is inquorate because the person who proposed the resolution does not attend.

3. Either of the parties may within 28 days of the deadlock or within 28 days of the date of the resolution in respect of which the deadlock arises (as the case may be) (the first day being the day after the deadlock or the date of the resolution as the case may be) serve notice on the other party (or parties) (“Deadlock Notice”) identifying the subject of the deadlock and outlining their position on the matter.

4. The parties undertake that they shall use all reasonable endeavours in good faith to resolve the dispute.

5. If no agreement has been reached within 7 days of the date on which the Deadlock Notice was issued the dispute shall be resolved by either allowing the current Chairman of the Board a casting vote on the issue or the Parties appointing an arbitrator to decide the issue, with all the costs of the arbitration to be met by the Company.

6. In the event that the Deadlock notice cannot be resolved under the provisions of 13.5. above the Shareholders shall appoint an independent “Umpire” to whom they shall each deliver within 30 days of the date on which the Deadlock Notice was served a sealed cash-only bid representing the maximum amount they are willing to pay to buy the other(s) out. The Umpire shall open the bids together and whichever Shareholder has tendered the highest (winning) bid shall forthwith buy the lowest bidding Shareholder’s Shares at the winning bid and the lowest bidding Shareholder shall sell his Shares to the winning Shareholder(s).

7. In the event that no agreement is reached pursuant to Sub-clause 13.6 above, the Shareholders shall immediately take all necessary steps to secure the timely winding up of the Company. The Shareholders shall cast all necessary votes at a General Meeting of the Company and shall cause the directors of the Company nominated by them to cast all necessary votes at a board meeting to approve the winding up of the Company, in addition to any other steps which are required to secure the winding up of the Company.

8. The Shareholders shall ensure that the liquidator is a properly licensed insolvency practitioner agreeable to all Shareholders. If the Shareholders are unable to come to an agreement the Company’s Accountants shall appoint the liquidator.

Reserved Matters

This is a standard clause within the typical Agreement and provides for events requiring unanimous approval of the shareholders and events where majority approval only required. For clarification unanimous approval is required for:

(a) alteration of Articles of Association;

(b) resolution for the winding up or liquidation of the Company;

(d) creation or grant of any Encumbrance over the whole or any part of company assets;

(e) the lending and advancement of monies to or guarantee the indebtedness of any person, firm or corporation;

(f) the change of nature or scope of company business or undertaking of any business other than that of the current Business;

(g) change of location of registered office;

(h) opening of other offices or outlets of the Company outside of the UK;

(i) instigation of any litigation save in respect of the debts owing to it in the ordinary course of business; or

(j) the company having as its accounting period any period other than a period of 12 months and have as the date of its Financial Year any date other than its current accounting date.

Majority Approval required for: (percentage can be determined but could be 75% for example)

(a) appointment or removal of any director of the Company;

(b) other than in the normal course of business transferring or otherwise disposing of or procuring such transfer or disposition of the whole or any substantial part of the assets or undertaking of the Company;

(c) acquisition of any new capital asset, undertaking or the entering into of any material long term contract (specifics can be added in here depending on business of the Company;

(d) purchasing or selling or taking or letting on lease or tenancy or otherwise acquiring or disposing of any real property or any estate or interest;

(e) engaging any person as employee or consultant or agent for a remuneration of more than (specified amount) per annum or increase or agree to increase by more than (specified amount) per annum the remuneration payable to any of its directors, officers, employees, consultants or agents;

(f) the acquisition or disposal of any shares, debentures, debenture stock or other securities in any other company;

(g) the allowance of the aggregate of the amounts borrowed and raised by the Company to exceed (specified amount); and

(h) in respect of any accounting period of the Company paying or distribution of any amount to the Shareholders in any capacity by way of dividend, bonus or other distribution of a similar kind.

Restrictions on the Shareholders

No shareholder shall (without prior written consent of the board – and for 12 months after being a shareholder in the Company):

(a) carry on or be employed, engaged or interested in any business which competes with the Business within the Restricted Area;

(b) deal with any person who is or has been at any time during the previous 12 months, a client or customer of the Company;

(c) canvass, solicit or otherwise seek the custom of any person who is or who has been during the previous 12 months, a client or customer of the Company;

(d) solicit or entice away from the Company any supplier to the Company who has supplied goods and/or services to the Company during the previous 12 months, if that solicitation or enticement causes or would cause such supplier to cease supplying, or materially reduce its supply of, those goods and/or services to the Company; and

(e) (e) solicit or entice away from the Company or employ or (directly or indirectly) offer employment or a consultancy to any person who, at or during the previous 12 months was an employee, director or officer of the Company and likely to be in possession of Confidential Information relating to, or able to influence the customer relationships or connections of, the Company.

Dividend Policy

It is quite common to specify that the Company shall not distribute from the profits of the Company and dividends for a period of 12 months (Year 1) from the date of the Agreement.

Thereafter (and in relation to any subsequent Financial Year) payment of dividends to the Shareholders can be specified in percentages and by referencing the Schedules appearing at the end of the Agreement individual names and addresses of members can be stated to clarify percentage amounts if it is considered appropriate.

The percentages payments will of course only apply only if there are sufficient profits available for distribution.

Drag along Rights

If at any time a Shareholder agrees to sell his Shares (the “Selling Shareholder”) to any other person or persons who are independent purchasers in good faith (the “Buyer”) the Selling Shareholder shall have the option but not the obligation to compel the remaining shareholders to sell their shares to the Buyer provided that such sale is on the same terms and conditions as those of the sale agreed between the Buyer and Selling Shareholder.

The ‘Tag Along’ option ) is where one of the parties is a minority shareholder. It is designed to protect the position of the minority shareholder where the majority shareholder decides to sell a defined percentage of shares in the company.