04 August 2021

Shareholders agreements: Legally designed

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what is a shareholder agreement and why does legal design make a difference?

One of the things that we are often asked to help with here at Lawbox Design are shareholder agreements. Sometimes we review existing agreements and make them more Legal User friendly (LuX), on other occasions we use legal design to go deeper and produce agreements that are not only used when things go wrong but to help things go right (more of that later!).

We thought it was about time to bring some of our learnings to the SoapBox.

what is a shareholder agreement?

Let’s start at the beginning. A shareholder agreement actually pretty much “does what it says on the tin”, it is a contract made between shareholders. The contracts can vary in length and complexity but, fundamentally, they set out the relationship between the owners of a business.

is it relevant for start-ups or smaller businesses?

Yes! Arguably they are even MORE relevant than they are for big public listed companies. In big public listed companies, the directors who run the company may hold shares in it, but more often than not they are independent of the shareholders (and each other) and they act in the interests of all the shareholders (majority and minority).

Often with smaller companies the owners and the directors are one and the same. It is this reality that can, down the road, lead to fall-outs and that is why it is a good idea to have an agreement in place from the outset.lawbox-design-shareholder-agreements-legal-design (2)

what should a shareholder agreement include?

A shareholder agreement will set out the relationship between shareholders. It can set out the types of things that need to be voted on by shareholders and it will cover what happens if one shareholder wants to leave. It will provide for what happens if one of the owners were to die. Who inherits the shares and what does that mean for the future running of the business?

Most shareholder agreements cover board meetings and therefore they also relate to how the business is run and managed. It is for this reason that we believe that these contracts should be more than a safety net for when things go wrong. They should be something that is referred to and looked at. To do that they need to be easy to read and help the business achieve its goals.

is it necessary to have one?

It isn’t a requirement to have a shareholders agreement and, as with most contracts, particularly ones that are written in a traditional way when things are going well it may not be referred to all that often. However, if things go badly then these contracts come into their own. The alternative is relying on the company’s Articles of Association, which are often silent on the very thing that has led to the breakdown in the first place.

As it is recommended that you have a shareholder agreement, and given it really hits at the heart of how a company is run, we think that it should be more than just a safety net. Using LuX, and/or legal design, means that for our clients the Shareholders Agreement is a contract that is read on many occasions. It is constructive and not just defensive.

what about joint ventures?

Shareholder agreements are often used in the case of joint ventures. As with “standard” shareholder agreements, documenting the agreement and covering a multitude of eventualities before they occur is a powerful exercise.

We encourage joint venture partners to take part in mini scrums before we draft the agreements. These provide an opportunity to really drill down into the detail and often provide a useful stand-alone exercise: often generating new ideas and collaborations, as well as forming the basis for us to put words onto paper!

how does this differ from a JV agreement?

The key difference is how the joint venture is set up. If the joint venture is an agreement between different independent people and/or companies, then the detail will be contained in a joint venture agreement. However, in some cases, a joint venture results in the creation of a new company, and the parties entering into the agreement become owners of the new entity. In this second case, the detail of the new venture is contained in the shareholder agreement.lawbox-design-shareholder-agreements-legal-design (1)

what are the sorts of things I should be thinking about?

As we have already noted above, one of the things that a legally designed shareholder agreement will do is provide you with the opportunity to really think about how your business is run. We will ask you lots of questions that often help clients do more than just tick the box of having a contract in place.

seven things to think about with shareholder agreements.

These are the top seven things that we encourage our clients to think about:

  1. The operation and management and decision making of your company – it’s vital that you consider the day to day operations of the company as part of the process and how the voting rights work
  2. The board of directors and rights to appoint new directors – clarification of this process and how you will appoint, remove and replace directors is helpful
  3. Share transfers and how you will tackle these
  4. Protection of the business’ interests – everyone’s agreement to protect the legitimate interests of the company (particularly important when shareholders are involved in the day to day operations of the business and familiar with trade secrets and client relationships)
  5. What to do if there is a dispute and, more importantly, if there is a deadlock on decisions
  6. How often you will meet and the process for those meetings
  7. Involuntary exits on death or injury (or even fallout) and how you intend to value your shares.

If you’d like to find out how we can help your business develop a shareholder agreement that is fit for purpose with the longevity you need plus a user-friendly presentation then get in touch!

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