Growing Your Business – Shareholders Agreements
Written by: Gabrielle Andersen l Insight Team
So far in our Commercial Law Series, we have explored the considerations for a business owner running their business, such as engaging employees: Obligations to Employees + Managing Them Efficiently, ensuring you’re appropriately meeting your legal obligations to your consumers and clients: Obligations To Your Clients: Consumer Law Advice and having your own business terms and conditions: Terms + Conditions and service agreements: Service Agreements prepared.
It’s now time to look to the future and think about growing your business.
Growing your business is often the main goal for business owners who are focused on achieving the most profitability and success out of their business concept. After all, a profitable business provides the business owner with greater wealth and opportunity.
Here we examine what growing your business – through the lens of the company structure – and the importance of having a Shareholders Agreement from the moment you have more than two shareholders in your company.
Changing Your Business Structure
Most businesses start small and for a variety of reasons will often be initially run under a sole trader arrangement. As a business grows, a company structure becomes more appropriate for a variety of reasons, including for asset protection or for tax purposes.
Take a look at our previous Commercial Law Services article outlining A Legal Guide To Business Structuring to understand the different types of business structures, and the advantages and disadvantages of each.
There are a range of factors that may motivate a decision to change or re-organise the current structure of a business, such as:
- Having grown to the point where it is important to streamline internal functions and create more delineation between roles such as Human Resources, finance, marketing, or internal compliance and business management;
- Wishing to encourage investment in your business by bringing in shareholders; or
- Being motivated by other factors, such as succession planning or even preparing your business for a profitable sale.
In this article, we’re going to focus on Shareholders Agreements and how they can play a part in not only growing your business, but also enabling succession planning and giving you a clear way to exit your business if you ever wanted or needed to in the future.
What Do Shareholders Agreements Normally Cover?
In preparing a Shareholders Agreement, we would consult with the business owners to decide on the following fundamental terms:
- Who the Directors of the business are;
- The current or anticipated Shareholders;
- The voting rights of classes of shares;
- Provisions relating to the governance of the company and how important decisions will be made. Not all Shareholders Agreements allow the shareholders to manage the operational aspects of the company, this is usually done by the Board of Directors of the company. A decision will therefore need to be made about whether the shareholders have a right to appoint or remove Directors of the company;
- Thought must also be put into what decisions require shareholder approval, and what level of majority is required to make such decisions. The Shareholders Agreement will also specify what decisions must be reserved only for the Board of Directors;
- How the Board of Directors operates, including when and how the board will meet and who must be present when it does;
- How new shares will be issued, and the process for new shareholders signing up to the Shareholders Agreement. Often Shareholders Agreements will include a Deed of Accession for this purpose;
- Whether there will be a process for the vesting of shares. Vesting means that a shareholder is allocated shares incrementally rather than being provided with their forecasted shares all at once (usually used in start-ups, or for existing employees being offered a shareholding that grows over time);
- Whether there will be an options pool. An option is a future right granted to a particular individual (usually a “key employee”) to purchase shares at some point in the future if certain conditions are met, i.e. they have met certain KPIs;
- Whether there are any classes of shares. Often shareholders are grouped by reference to the “class” of shares they own. Each class of shares provides different rights and corresponding obligations. The Shareholders Agreement will also outline specific events that might cause or allow the conversion of shares from one class to another;
- What should happen to the shares when an employee no longer works for the company;
- The process for transferring shares to existing or new shareholders;
- The process for issuing any new shares, and whether there should be provisions preventing the dilution of any existing shares;
- The process for disposing of shares, including whether there are any drag-along and tag-along rights, pre-emptive rights, or restrictions on the transfer or disposal of shares;
- What will be considered an exit event, such as: when a company sells a substantial amount of shares or assets; when the company merges with or is acquired by another company; when the company is liquidated; or conversely, where the company’s shares are listed on the stock exchange (known of as an IPO); and
- What will be considered a material breach of the Shareholders Agreement, and what should happen with the shares of a shareholder who is found to have materially breached the Shareholders Agreement.
If this list seems overwhelming, don’t worry! All of these matters are very familiar to commercial lawyers with experience in preparing Shareholders Agreements, and our team will be able to guide you expertly through the process of creating a Shareholders Agreement for your company.
When Does A Shareholders Agreement Become Necessary?
Shareholders Agreements are a good idea as soon as there are two or more shareholders in a company. While most partnerships between two business owners start out as amicable, circumstances can change, and one vital way to minimise the opportunity for conflict is to have clear terms agreed between business owners from the outset.
Preparing a Shareholders Agreement can also provide the opportunity for business owners to turn their minds to certain events potentially occurring, and allow them to make decisions about what they would like the outcome to be before any actual issues arise.
Even if your company is still in the start-up phase and is not looking to raise capital immediately, having a Shareholders Agreement in place is a prudent business management tool.
What Are The Benefits Of A Shareholder’s Agreement?
The benefits of a Shareholders Agreement for a start-up are that it will:
- Provide a framework for how you intend to run the company and what shareholders obligations to the company are;
- Show prospective investors that your company is well-managed, and allows you to set in stone the terms for how the company is to be run in the future. Without a Shareholders Agreement already in place, a new investor may be able to dictate and take control of the form of any future Shareholders Agreements; and
- As outlined above, it will provide clear guidance in the event that any disputes arise between any business owners in the future.
What If You Already Have A Shareholders Agreement?
Our commercial lawyers are experienced in reviewing existing Shareholders Agreements in order to ensure that they still meet the needs of your company, or discuss with you any suggested amendments that might be needed.
Succession Planning – How Can Shareholders Agreements Help?
Succession planning essentially is the process you put in place to enable your company to continue to run after you exist. Having a strong succession plan in place can lead to a more profitable, stable and long-lasting business. Succession plans can change over time, and it is an important aspect that business owners should continue to review.
Now that we have outlined the fundamentals of Shareholders Agreements, it should be clear how crucial they are in not only growing the investment in your business but also in enabling processes for selling down or gradually transitioning out of your business – all while realising the equity you have put in.
Want to know more about succession planning? Check out this blog we have previously put together that takes you through it from start to finish: Succession Planning Is Not Just A Collection Of Buzz Words.
Expert Legal Advice + How Canny Insight Can Help?
Our commercial lawyers are on hand to discuss with you the many available options in growing your business.
If a Shareholders Agreement is appropriate for your existing company, or you’re hoping to grow to a point where new shareholders can be introduced, we can expertly create a Shareholders Agreement that is specific to your company, and which contains the appropriate mechanisms for managing your company and the rights and obligations of the shareholders to your company.
Get in touch with our team today to see what legal solutions we can come up with to help grow your business.
