close menu

What you should include in a shareholder agreement

by Ashley Deakin | Jun 17, 2016
  • Being prepared for tough times is key for any entrepreneur. This is particularly true if you are setting up a business in a foreign country. Creating a shareholders agreement is a great way to lessen some of the risks associated with setting up a business outside of your home country. Below are five of the most commonly included provisions in these agreements.
    hand-shake-business-man2
    When starting a business, spirits are high and thoughts are that it will be a raging success. This tide of optimism often means that the creation of a shareholder agreement is overlooked. However, you need an agreement that clearly sets out what needs to happen if the business fails. 

    To ensure there is certainty, a shareholder agreement should include sections on: The positive obligations of shareholders; rights of veto; the issue and transfer of shares; the right to appoint directors; dispute resolution.

    1. Positive obligations of shareholders

    The shareholders’ agreement should include:
    • The activities the company will carry out along with its intended rate of growth.
    • The intended exit route and the timescale for achieving it.
    • The company’s dividend policy: The agreement should state what profits need to be paid out as dividends and the proportion that will be retained to fund the business.
    • The composition of the board of directors and senior management team, and their remuneration and other terms of employment.
    • Levels of permitted borrowing.
    • Future funding: How much will be needed? What form will it take? How much will each party will put in? Will third parties be allowed to contribute and on what terms?

    2. Rights of veto

    Parts of an agreement can stipulate that certain decisions usually taken by directors or shareholders cannot be made unless all shareholders agree to them. This gives minority shareholders the right to veto any decision that may harm their interests. It is vital that the rights of veto are clearly laid out.

    Rights of veto are usually set up with regard to decisions to:

    • Issue further share capital
    • Change the company’s articles of association
    • Buy or sell a business, or any asset of more than a certain value
    • Buy or sell a significant stake in another company
    • Acquire or dispose of any premises
    • Appoint or remove a director
    • Award directors or employees more than a certain level of remuneration
    • Dismiss a director or employee who is remunerated above a certain level
    • Borrow above a certain level
    • Grant security over the company’s assets
    • Incur capital or hire purchase commitments above a certain level
    • Take out or vary insurance other than for full replacement value
    • Buy any of the company’s shares back from a shareholder
    • Take action to wind the company up
    • Prevent favourable contracts or arrangements between the company and its directors or shareholders other than on agreed terms

    3. Issue and transfer of shares

    Often, a shareholders’ agreement will allow minority shareholders to veto any issue or transfer of shares. These agreements can also require the company (on an issue) to offer the shares to existing shareholders, pro rata to their holdings before they can be issued to anyone else. The same usually applies when a shareholder decides to transfer his or her shares to an outside party.

    If a pro-rata offer must be made, the agreement needs to provide a means of valuing the shares – by reference to an expert or arbitrator, or according to some formula in the agreement. 

    4. Rights to appoint directors

    Shareholder agreements often have provision aimed at protecting outside investors’ interests, by allowing them to appoint a director to the board of the company.

    5. Dispute resolution

    Agreements may contain a mechanism for resolving disputes, such as referral to a third party expert or arbitrator.

    A buy-out mechanism can also be included. For example: If a dispute occurs, one side buys out the shares of the other at a price determined in accordance with the agreement. It can even provide that, in the event of an unresolved dispute, the parties agree to vote to wind the company up.

    The issue of which party buys out the other, and at what price, can be extremely difficult to negotiate. Agreements can become quite complex. One solution, is to say that one shareholder can offer his shares to the others at a price of his choosing. If they accept, they pay the price he has set.

    To stop the seller from setting an unrealistic price, the agreement also provides that, if the buyer does not accept the offer, he becomes obliged to sell his shares to the seller, and he to buy them, at that price. The seller will not want to set too high a price for his shares, because he may end up having to buy other shareholder’s shares at that price himself.

    As noted, these agreements can become quite complex. However, not having a clear set of rules regarding shareholders and their rights and duties may land up causing you more headaches than is necessary


    Our UK business migration experts can help you set up a shareholders agreement. Give us a call on +44 (0) 20 7759 7584 or send an email to ukbusiness@sableinternational.com.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

    • Business-concept
      Moving your business to the UK? You’ll need to understand the UK’s VAT regulations
      Nov 12, 2018  |  by Scott Brown
    • Autumn-statement-banner-no-logo-white
      Highlights from the 2018 Autumn Statement
      Oct 30, 2018  |  by Scott Brown
    • man-in-front-of-shop
      A quick guide to UK business tax
      Oct 26, 2018  |  by Scott Brown
    • working-man-contractor
      Self-employment vs. contracting in the UK: What’s the difference?
      Oct 11, 2018  |  by Kobus Van den Bergh
    • man-relaxing
      Why your SME needs management accounting
      Oct 10, 2018  |  by Scott Brown
    • yes no cross tick
      HMRC’s employment status test continues to frustrate UK contractors
      Sep 24, 2018  |  by Kobus Van den Bergh
    • Money
      Leaving the UK? Get some extra cash by claiming your tax refund
      Sep 20, 2018  |  by Kobus Van den Bergh
    • Businessman-on-graph
      How you can stop worrying and learn to love outsourced accounting
      Aug 03, 2018  |  by Scott Brown
    • tax-deadlines
      Self Assessment deadline reminder! Second payment due end of July
      Jul 25, 2018  |  by Kobus Van den Bergh
    • magnifying-glass-contract
      IR35: Are you in or are you out?
      Jul 02, 2018  |  by Kobus Van den Bergh
     
     

    South Africa

    Cape Town

    Regent Square
    Doncaster Road
    Kenilworth 7708 +27 (0) 21 657 2120

    Durban

    25 Richefond Circle
    Ridgeside
    Umhlanga 4320 +27 (0) 31 536 8843

    United Kingdom

    London

    Castlewood House
    77/91 New Oxford Street
    WC1A 1DG +44 (0) 20 7759 7514

    Croydon

    5-7 Selsdon Road
    South Croydon
    CR2 6PU +44 (0) 20 7759 7581

    Australia

    Melbourne

    9 Yarra Street
    South Yarra
    VIC 3141 +613 (0) 8651 4500

    Sable International is a trading name of 1st Contact Money Limited (company number 07070528), registered in England and Wales. We are authorised and regulated by the Financial Conduct Authority in the UK (FCA no. 517570), the Financial Services Conduct Authority in South Africa (1st Contact Money [PTY] Ltd - FSP no. 41900) and hold an Australian Financial Services License issued by ASIC to deal in foreign exchange (1st Contact Group - AFS License number 335 126).

    We use cookies to provide the best website experience for you. Using this website means that you agree to this. How we use cookies.