Darlingtons provide a specialist and highly cost effective service for preparing shareholder’s agreements, offering a sensible way to document both day to day rights and responsibilities for shareholders but which also deal with the many contingencies that can and do arise with owning and running limited companies.
Our commercial solicitors have wide ranging and deep experience in advising on shareholder agreements for start ups, joint ventures, where new investors come on board and in many different sectors and sizes of business. This experience not only offers reassurance but saves time and money.
It is not a legal requirement for a company to have a Shareholders Agreement. So what are the benefits of having an Agreement and having it drafted by solicitors?
Other parts of the agreement often provide that important decisions, whether or not they would ordinarily be taken by the directors or the shareholders, cannot be made unless all shareholders agree to them – so minority shareholders can veto them.
Typically, these include decisions to:-
A pre-emption right in its most basic form is the right for an existing shareholder of a company to either exercise its rights in relation to an issue of new shares or purchase shares from an out going shareholder.
Pre-emption rights are often expressed to be in relation to the percentage of shares already held by the shareholder who is exercising its rights.
Pre-emption rights are important as they allow a shareholder to be able to protect themselves from having their shares de-valued by dilution or in a private company to prevent a shareholder from selling or transferring its shares to another party whom they may not wish to be in business with.
Shareholders can of course choose to disapply the pre-emption rights should they wish. On an agreed sale of shares it is sensible for a shareholder to confirm in writing that they waive their pre emption rights. This protects both the outgoing shareholder and the new shareholder in the future should the existing shareholder wish to bring a claim in relation to the pre-emption rights.
There are a number of situations where it would not work to have pre-emption rights and they would not apply such as employee share schemes, allotment of subscriber shares etc.
If there are different classes of shares within a company the pre-emption rights may only be in respect of the class of shares that the shareholder in question already holds. For example if they have A shares they may well not have pre-emption rights over B shares.
The concept of a bad leaver is linked to potential actions which might be termed selfish, self serving or damaging to the business or the interests of other shareholders. Bad leaver provisions generally seek to not only create mechanisms to remove the person from the company, at employee, board and shareholder level, but also to penalise the person for their actions. The most usual method for this is to require sale of the individuals shares to the remaining shareholders possibly at a discount.
Bad leaver provisions may reflect the fact that for serious wrongdoing or damage, such as fraud, it may not be possible to adequately pursue other remedies against the wrongdoer.
Again, each case is different and there is considerable scope for deciding what this term should mean and how it applies – an experienced shareholder agreement law firm will advise and draft appropriate clauses. However, a typical example of a good leaver might be someone who leaves the company for reasons of ill health or because the company makes him or her redundant. This may apply either at shareholder or employee level. As regards shareholders, the concept of sweat equity often comes into play – this relates to the amount of time and “sweat” a shareholder has put into the business so that an individual who has remained as a shareholder for a designated period of time and/or contributed in some way to the business growth may be entitled to retain shares if leaving as an employee or may be required to sell them back to the company, but the sale price be a genuine reflection of the commercial value of the shares.
Drag rights favour the majority shareholder. They enable the majority shareholder to compel the other shareholder(s) to sell their shares if the majority shareholder has agreed terms for the sale of the company to a buyer.
As the name suggests it allows the majority shareholder to drag the other shareholders along. Buyers rarely agree to permit a minority shareholder to retain a minority share. The minority cannot be compelled to sell unless, not only the price but also the terms upon which the majority shareholder has negotiated the sale, such as payment by instalments or a performance based additional price, must be extended to the minority shareholder otherwise he cannot be compelled to sell.
Drag along protects the majority shareholder from being “locked in” whilst at the same time ensuring that the minority shareholder is treated identically with the majority shareholder.
This needs a great deal of thought as you discuss your shareholders agreement with your fellow shareholders. Are you willing to be forced to sell? Can you rely on the judgment of the majority shareholder? What if he chooses to sell to another company in which he has an interest? Should that be covered in your agreement? You would be well advised to seek the guidance of a specialist company lawyer but at least this article will help you to spot the Drag Along provisions in your draft agreement
Not surprisingly the tag clause is designed to protect the minority shareholder from being left behind when a majority, or substantial, shareholder decides to sell. It enables the other shareholder(s) to force the selling shareholder to make it a condition of sale that the buyer must offer to buy the shares of the other shareholder(s) at the same price and on the same terms at the same time.
Drag and Tag both protect the value of the shares in a company by avoiding the shares being locked in. A 10% stake is difficult to sell and, therefore vulnerable to a buyer forcing a sale at a price which may have little relationship to the value of the company as a whole. It may, therefore be very important in terms of your investment in the company to ensure that your shares can form part of a larger number of shares thus keeping the price up. On the other hand without Tag rights you may find yourself stuck with an unsalable or devalued shareholding. Tag rights provide protection for the shareholders’ share value from being adversely affected due to them not being able to sell them.
If you need a shareholder contract drawn up, have been offered an agreement already drafted or perhaps need to adjust, edit or renegotiate an existing shareholder agreement, get in touch with our lawyers.