If you have more than one shareholder in your company then you should consider agreeing the terms of a shareholders agreement which regulates the rights and obligations of shareholders. It is a private and confidential document and unlike the Articles of Association it is not lodged with Companies House. Basic points to consider include:
Shares
Will there be different classes of shares with different rights attaching to the shares?
Class rights include dividend rights, right to attend shareholder meetings and vote, right to participate in a trade sale.
Share Transfer
Under what circumstances can/ must shares be transferred?
It is possible to have a Permitted Transfer provision which allows a shareholder to transfer the shares to a close family member or a family trust. There should also be default provisions that deal with transfer back in the event that the arrangement terminates which includes the family member dying or the family trust being dissolved.
You should also consider including Compulsory Transfer provisions. This means that a shareholder must transfer his shares to either the company or the other shareholders, upon the occurrence of a trigger event. Trigger events in relation to an individual shareholder include:
a. Death of the shareholder;
b. Mental illness;
c. Physical illness;
d. Bankruptcy;
e. If the individual is also an employee and/ or director, in circumstances where the individual leaves the company and ceases to be an employee and/ or director.
You will need to determine whether the share value upon compulsory transfer will be market value, discount to market value or nominal value.
If the shareholder simply wishes to transfer his shares then it is quite standard for the shareholders agreement to include pre-emption rights on transfer which means that the existing shareholders have a right of first refusal to acquire the sale shares on a pro-rata basis. If the existing shareholders do not acquire all of the sale shares then in certain circumstances they can be offered to third parties. It will be important to include a share valuation provision too.
New Share Issue
Under what circumstances will you need to issue new shares?
Many companies require funding which can be in the form of equity investment. This means that an investor will get a shareholding in the company in exchange for a capital investment. The company can issue and allot new shares to the investor.
You will therefore need to consider the best mechanism for issuing and allotting new shares and whether statutory pre-emption rights should be excluded (ie right of first refusal). You will also need to consider whether all the existing shareholdings will be diluted as a consequence of the new issue.
The author is Christian Browne who is a business solicitor and the Managing Director of Summerfield Browne Solicitors (www.summerfieldbrowne.com). Christian Browne is also a legal advisor with the Institute of Directors.
