Corporate Shareholders Agreement govern the rights and obligations of shareholders and work in tandem with the Articles of Association of a company. Many of the provisions of a Shareholders Agreement can be included in the Articles but the advantage of including them in an agreement is that the agreement will be private and confidential unlike Articles which are a matter of public record.
Where there is a conflict between the agreement and the Articles, it is common for a provision to be included in the agreement which specifies which takes priority if there is a conflict between the provisions of the agreement and the Articles.
Shareholders Agreements are commonly used in Corporate Joint Ventures where two or more parties collaborate and set up a new company to pursue the collaboration.
Before drafting the agreement you will need to consider the following:
1. The parties. You will need to determine who the shareholders will be. It is common for shareholders to be corporate entities and also private individuals. You should take tax advice on this point.
2. Shares. You will need to consider the proportion of shares to be offered to each shareholder. In deciding share proportions, you will need to factor into the decision the key shareholder thresholds which are required to pass shareholder resolutions. A simple majority, over 50% share ownership is required to pass an ordinary resolution, and 75% share ownership is required to pass a special resolution.
3. Share Types. It is possible to have different types of shares such as ordinary shares, preference shares, redeemable shares etc. It is advisable in the early stages to keep things simple and therefore having a single type of shares might be appropriate, such as ordinary shares.
4. Classes of Shares. It is also possible to have different classes of share within a specific share type. If ordinary shares are to be issued, it is possible to have A ordinary and B ordinary shares with different class rights. For instance the B shares could be non-voting and also non-dividend, this means that the B shareholder cannot vote at a shareholder meeting and will not receive dividends. Determining what class rights are suitable is generally determined by the nature of the venture and you should consult with your corporate solicitors.
5. Object and scope of the venture. The agreement should detail the object and scope of the joint venture and in many cases will cross refer to a business plan for this purpose. A business plan should clearly detail the proposed business venture.
6. Funding. The agreement should clearly consider capitalisation and funding. Any venture, particularly a new one requires working capital. Working capital is not only required at inception but is also required during the term of the venture. Working capital can be funded in a variety of ways including new share issue, loans and grants. Capitalisation and funding options should be included in the corporate shareholders agreement and/ or the business plan.
Summerfield Browne Solicitors have offices in London, Birmingham, Oxford, Cambridge, Northampton and Leicestershire.
