Corporate law
Shareholders' agreements and shareholder buy-outs
A well-drafted shareholders' agreement is written while the owners agree – to work on the day they no longer do. We draft and review shareholders' agreements and assist when a shareholder is to be bought out.
When is advice needed?
- The company is founded by several people or admits a new shareholder.
- An investor is to provide capital.
- An existing agreement is outdated or no longer fits the business.
- A shareholder wishes or is required to leave the company.
- The shareholders disagree and need an orderly solution.
What a shareholders' agreement should cover
Governance and decisions
The right to appoint board members and which decisions require the consent of all or a qualified majority.
Transfer of shares
Pre-emption, consent requirements and when a shareholder may sell to third parties.
Drag-along and tag-along
A drag-along allows a majority to carry out a sale of the whole company. A tag-along protects the minority by giving the right to sell on the same terms.
Trigger events
What happens on breach, termination of employment, illness, death or insolvency, and at what price the shares are then to be transferred.
Non-compete, confidentiality and disputes
The shareholders' duty of loyalty to the company and how disputes between them are to be resolved.
Shareholder buy-outs in practice
When a shareholder is bought out, the terms of the agreement largely determine how smoothly it goes. Without an agreement everything must be negotiated from scratch.
- Price
- The agreement may set a valuation method, an independent valuer, or different prices depending on the reason for exit.
- Financing
- The purchase may be financed by the other shareholders, by the company within the limits of the Companies Act, or by deferred payment.
- Employment and non-compete
- If the exiting shareholder also works in the company, employment and restrictive covenants must be dealt with at the same time.
- Documentation
- Share transfer agreement, updates to the share register and board, and any settlement terms.
Questions and answers
Does the shareholders' agreement bind new shareholders?
Only if they accede to it. The agreement should therefore require any acquirer of shares to sign a deed of adherence.
Can a shareholder be forced to sell?
If the shareholders' agreement so provides, a shareholder may be obliged to sell, for example upon material breach. Without such terms the possibilities are very limited.