A shareholders’ agreement is a contractual agreement between the individual shareholders of a company setting out what they have agreed on; matters such as capital required, dividend policy, quorums and voting at meetings.Shareholders’ agreements can also contain restrictive covenants (non-compete undertakings) and a list of “Reserved Matters” which might require a higher threshold of approval than routine business decisions.
A shareholders’ agreement is a private agreement between individuals.Certain areas might be reinforced or even repeated in the company’s articles of association, but to the extent that matters are confidential or personal they will be confined to a shareholders’ agreement.
The company’s articles will need to be tailored so that they complement the shareholders’ agreement, although, typically, the latter will prevail if the provisions do conflict.Important matters covered in articles typically include pre-emption rights on the issue or transfer of shares, any drag or tag rights as well as any good/bad leaver provisions.
One of the great benefits of preparing a shareholders’ agreement early in the life of a company is that it makes sure the shareholders have worked through all the key issues in the shareholder relationship. It’s a great way of ensuring that all parties are actually on the same page, rather than just assuming that is the case. For example, one shareholder might think the intention is to build reserves in the company and another that all available profits will be paid out. An early conversation on remuneration and dividend policy would make sure the issue was thrashed out ahead of it becoming a cause of disagreement.
Private companies should also put in place shareholder insurance. Unlike key man insurance, which pays a benefit to the company on a death,this is a policy whereby a Shareholder (‘A’) will insure his life and assign the benefit of the policy into a trust for the benefit of the other Shareholder (‘B’) – assuming there are only two shareholders.
A and B will then enter into a “cross option” agreement, whereby on (for example) the death of A, B will be entitled to ‘call’ for A’s shares in the company to be sold to him.He will pay for these shares with the proceeds of the policy on ‘A’s life which have been put into trust for the benefit of B.The net effect is that B will end up owning all the shares in the company and A’s estate will receive cash for his shares, usually at market value.Any surplus proceeds of the life policy will go to A’s nominated beneficiaries as they should also be able to benefit from the life policy proceeds in the relevant trust.
It is generally better form a tax point of view for the premium on this type of policy to be paid by the individual who takes out the policy and not the company. This should ensure that any proceeds of the policy are not taxable.
The level of life cover should be reviewed regularly to ensure that it corresponds closely enough with the amount that would be required to pay for a deceased shareholder’s shares.
If you would like to know more about shareholders’ agreements or cross option arrangements please contact any member of the Corporate Team at Lupton Fawcett in Leeds, York or Sheffield.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.