I could have sworn that I'd blogged on the undoubted benefits of shareholders' agreements only five minutes ago, and certainly some time in 2013. However, a quick trip down memory lane and a sift of my 'blog library' reveals that it was actually 2012 when I last implored my readers to use such a document . It's not as though the subject isn’t dear to my heart, or that everyone who should have such an agreement actually now has one as a result of my incessant badgering. It's more that I've tried to cover a broader range of topics over the last few months (online selling, agency/distribution, defamation by Twitter and driving supercars, to name but a few), but now I feel the need to get back on my soapbox. The simple reason is that I recently came across a situation where a shareholders' agreement would have given us a reassuring strength of bargaining position. The background is that my client has a majority shareholding in a company but doesn’t like the way the board (appointed by the minority) is running the company.
Unfortunately there is no shareholders' agreement and we're having to rely instead on the 'blunt instrument' of my client having 61% of the shares in the company in question. If all else fails, we can pass ordinary (50%+) resolutions (i) appointing new directors of our choosing; and (ii) removing some or all of the existing board (originally appointed by the minority shareholders). In short, we can take effective day to day control of the company via its board. You might say 'so what's the problem?' Quite simply, regardless of what we can do at board level, the problem will be our inability to force a sale of the company without the consent of the minority shareholders. If I'd got my hands on the company at the time that it was issuing shares to the minority shareholders and allowing them to choose the board I'd have suggested a shareholders' agreement controlling not only (a) the board composition, but also (b) decision-making on key matters; and (c) the transferability of shares. It's this transferability point which may become a problem in future if a third party offers to buy 100% of the company and my 61% shareholder client can't 'drag' the others (ie oblige them to sell at the same time at the same price per share). I've seen these situations before and what may happen is that the minority shareholders demand a disproportionately large share of any sale proceeds before they'll sell.
In time-honoured fashion I thought that a few 'FAQs' might help, so here we go:
Q: When do I not need a shareholders' agreement?
A: When you own all of the shares in the company.
Q: When should I think about having one?
A: Whenever you have two or more shareholders (or are about to do so).
Q: What about just hoping for the best and doing without?
A: That's fine, as long as you're 100% dead certain and would bet your house that all of the shareholders will agree on everything forever.