Corporate Shareholders Agreements can be used in a variety of scenarios and for differing purposes. A shareholders agreement can be included as part of an investment agreement whereby an investor invests in a company and receives shares in return for the investment.
The agreement is also used in joint ventures to regulate the rights and obligations of the collaborators. During the period of negotiation, and prior to agreeing formal terms for the proposed venture, you should consider and evaluate the following matters:
1. Composition of the Board. In conjunction with the Articles of Association, the Shareholders Agreement should detail the composition of the Board including the minimum and maximum number of directors on the Board and the number of directors that have to be present for there to be a valid Board meeting. You will also need to determine who will be Chairman and whether the Chairman will have a casting vote.
2. Business Plan. Where the venture is a start-up it is advisable for the parties to agree a business plan. The agreement should include obligations on producing a business plan during the course of the venture and also the procedure for approving the business plan.
3. Dividend Policy. The parties will need to determine a dividend policy. Dividends are only payable from distributable reserves and if no reserves are generated in any year then dividends cannot be paid. The dividend policy can be discretionary and subject to the approval of the Board and Shareholders. Alternatively the policy can be a pre-determined formula which can be included in the corporate shareholders agreement. You should note that it is possible to have different dividend policies for different classes of shares. In the event that interim dividends are paid during the year then you will need to ensure that terms relating to potential overpayment are included in the agreement.
4. Issuing New Shares. Where new shares are issued in the company then the issue will be subject to statutory pre-emption rights, which means that the new shares must be offered to the existing shareholders on a pro rata basis. However, it is possible to dis-apply statutory pre-emption rights such that the issue of new shares, and the determination as to whom they should be offered, is at the discretion of the directors.
5. Share Transfer. This can be quite a complicated aspect of the corporate shareholders agreement and you should consult your corporate solicitors. At a basic level share transfer can be drafted in various different ways. It is common for there to be pre-emption provisions on transfer such that the shares must be offered to the existing shareholders in the first instance. In certain instances if the existing shareholders do not take up their entitlements then they will be offered to any other existing shareholders who have taken up their entitlements. In the event that there are any shares still unallocated then they may potentially be offered to third parties subject to director approval.
Summerfield Browne Solicitors have offices in London, Birmingham, Oxford, Cambridge, Northampton and Market Harborough, Leicester, Leicestershire.
