A shareholder agreement is an agreement setting out the boundaries of shareholders’ investment in a company. It is vital for any company which wants to run smoothly and lessen risk to have a well drafted shareholder agreement in place.
A shareholder agreement can be particularly useful in both preventing and settling disputes, because a well drafted agreement will set out all of the parties’ rights and obligations, so that everyone has a clear idea of what is expected of them.
It is particularly helpful in small or medium sized companies, where the shareholders are often the business owners and the directors.
- a well drafted shareholders agreement should include the rights and obligations of the shareholders and their role in the day to day management of the company;
- it should also include what happens if shareholders fall into dispute, how such disputes can be resolved, and how shareholders can exit the business in a fair way, including whether there are pre-emption rights to other shareholders to purchase the exiting shareholder’s shares, and if so, on what basis and how the shares are valued.
Negotiating new terms in a shareholders agreement
A shareholders agreement is a contract between the shareholders and the company. Like any contract, this can be amended and updated as circumstances change within a company. However, this will rely on all the parties agreeing changes, and therein a problem may lie if shareholders are in dispute already and are unable to see the benefits of renegotiating the shareholders agreement.
However, if negotiating a new shareholders agreement or amending the old one is approached properly, then this is possible even in times of dispute. A reassessment of the agreement by all parties might help with a dispute by clarifying and confirming the expectations of the parties, and ensuring that going forward, roles and expectations are clear in order to avoid further disputes.
Many disputes between shareholders and the company and company’s officers are down to a difference in expectations and a breakdown in communication. As an alternative to the other more serious remedies available to a shareholder, the company and the shareholders may prefer to at least try to sit around a table and discuss matters to reach a resolution by amending a shareholders agreement.
In order to obtain some independent input and to keep matters on a professional level, when negotiating a change or amendment to a shareholders agreement professional advisers should be instructed. An independent professional expert will be able to draw out the problem issues, and lead negotiations to resolve them. This can take the heat off opposing shareholders and directors, to avoid further dispute which might lead to shareholders wanting to exit the company, or deciding to remove a director or directors.
At Francis Wilks & Jones we have many years of experience in setting up and drafting shareholders agreements and in managing shareholder disputes. Contact us to discuss any of these issues today.